At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." While the pinstripe-and-wingtip crowd is entitled to its opinions, we've got some pretty sharp stock pickers down here on Main Street, too. (And we're not always impressed with how Wall Street does its job.)
Given this, perhaps we shouldn't be giving virtual ink to "news" of analyst upgrades and downgrades. And we wouldn't -- if that were all we were doing. Fortunately, in "This Just In," we don't simply tell you what the analysts said. We also show you whether they know what they're talking about.
This morning, analysts are talking up shares of CVS Caremark (NYSE: CVS) and AK Steel (NYSE: AKS), but telling investors to drop James River Coal (Nasdaq: JRCC) in a deep, dark hole. Let's find out why, beginning with...
"Take two shares of CVS, and call me in the morning"
Is CVS Caremark a cure for what ails your portfolio? BMO Capital thinks so. This morning, the Canadian investment banker pointed to CVS's Q2 report of 18% better earnings on 16% revenue improvement as two great reasons to own the stock.
CVS cited last quarter's tiff between Walgreen (NYSE: WAG) and its pharmacy benefits manager, Express Scripts (Nasdaq: ESRX), as helping CVS swipe as many as 7 million new prescription customers. Walgreen and Express Scripts have since kissed and made up, but CVS management says it plans to hold on to much of its increased market share -- and BMO thinks they can do it.
BMO argues CVS is priced to "outperform" the market, and it may be right. Although on the surface, CVS's 15x P/E ratio doesn't seem attractive relative to projected 12% long-term earnings growth, CVS is actually a whole lot more profitable than meets the eye. Free cash flow for the past 12 months (a whopping $4.8 billion) is running 31% ahead of GAAP net income, giving the stock a 12x price-to-free-cash-flow ratio -- appropriate for the growth rate. Factor in CVS's modest 1.4% dividend, and I'd argue CVS is even a little bit cheaper than it should be.
Is everything A-OK at AK?
If only I could say the same about today's other featured upgrade. Yesterday, steel investors cheered when AK Steel flexed its pricing muscle and raised prices on flat-rolled steel by $30 a ton -- its second price increase in as many weeks. Shares rose nearly 3% on the news, and this morning they're tacking on an extra 6% in response to an upgrade to "buy" from analysts at CRT Capital. But are the gains deserved?
Steel Market Intelligence notes that AK's price hike may not "stick." If other steelmakers fail to follow suit and raise their own prices, AK may be forced to roll back its own prices to remain competitive. SMI says this could happen because U.S.-manufactured hot-rolled steel "is now selling at a 13% premium to imports."
Investors, betting that AK's spurt of price hikes is the start of a return to profitability for the steelmaker, may be setting themselves up for disappointment.
James River Coal: "I'm down in a hole..."
And speaking of disappointment: James River Coal. With a stock down 80% over the past year, James River has delivered little other than disappointment to investors lately. Now, adding insult to injury, the stock is getting pounded in response to a new "underperform" rating from Imperial Capital.
Priced at just $2 and change today, Imperial Capital says that James River could fall by half again, and hit just $1 a share by the end of this year. Maybe even sooner than that -- James River reports earnings tomorrow, and if the news isn't good, investors could have less than 24 hours to get out of the stock before it's too late.
Or... not. James River's circumstances are dire -- don't get me wrong. The company's not profitable, nor do analysts expect it to become so for at least another year. Tough economic times in the coal industry have already claimed one victim, when rival Patriot Coal filed for bankruptcy last month, and with nearly $400 million in net debt, James River could be next on the "BK" list. But at last report, the company was still keeping its head above water, and generating positive free cash flow from its business. (Patriot wasn't.)
While I wouldn't necessarily risk going long this stock ahead of earnings, if James River shows positive cash generation again tomorrow, the stock could still make a comeback. My advice: Don't be a market lemming. Give 'em some time before selling -- at least 24 hours. After all, with the stock already down 80%, you haven't that much more to lose.
(On the other hand, if you've lost patience with James River Coal, can't take the pain anymore and want to cut your losses -- we've got you covered there, too. Make a fresh start by adding The Motley Fool's Top Stock for 2012 to your portfolio).
Whose advice should you take -- mine, or that of "professional" analysts like BMO, CRT, and Imperial Capital? Check out my track record on Motley Fool CAPS, and compare it to theirs. Decide for yourself whom to believe.
