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.
Today, Wall Street is talking down expectations at multiple marquee names: Wells Fargo (NYSE: WFC), Intel (Nasdaq: INTC), and AMD (NYSE: AMD) all got downgraded Monday morning, while Netflix (Nasdaq: NFLX) was initiated... at sell. (So if you were wondering why the Dow was down today, now you know.)
All's not Wells in Fargo
Let's begin right at the top, with Wells Fargo, now joining JPMorgan Chase (NYSE: JPM) on Wall Street's hit list. As you probably recall, JP got hit with a downgrade to hold at Standpoint Research last Friday, a call primarily motivated by valuation, and the fact that JP shares had bounced back nicely since their "London Whale" sell-off.
Similarly, I wouldn't be a bit surprised if valuation lies behind the reason for Stifel Nicolaus' surprise downgrade of Wells Fargo (to hold) this morning. After climbing 48.5% over the past year, the profits are certainly there for the taking. Meanwhile, at a valuation of nearly 12 times earnings, Wells shares look at best fairly priced -- and possibly a bit overvalued -- based on consensus expectations of 8.5% long-term profit growth.
Does Wells' dividend yield help make up the difference? Sure it does. In fact, at 2.4%, the payout here is downright generous. But it's not enough to turn Wells back into the value stock it was a year ago, and it's not enough to justify keeping a buy rating on it. Stifel is right to downgrade.
Cash in your chips
Continuing the "Me, too!" theme on the Street today, analysts at Longbow are now echoing Citigroup's dismal prognosis for the semiconductor industry. (First voiced last week.) Citing the same weakness in personal computer sales that got Citi feeling skittish, Longbow downgraded both Intel and AMD to neutral this morning. The theory, then as now, is that if PCs aren't selling, then PC makers aren't buying computer chips to put in 'em -- bad news for Intel and AMD alike.
Intel shares are reacting as you'd expect, falling nearly 1%. AMD, on the other hand, is taking a perverse turn and actually rising despite the "bad" news. My advice? Don't waste too much time wondering why. Instead, just take advantage of the situation.
As I explained last week, all hopes of a turnaround notwithstanding, AMD remains a company with no profits, and no dividend. In contrast, Intel is profitable, costs less than 10 times earnings, and pays a 3.9% dividend yield. While I'm not sure either one is worth buying, the fact that overpriced AMD shares are getting even more expensive today, while Intel shares are getting cheaper, offers an intriguing opportunity to play the "arbitrage" game and buy the better stock, short the weaker, and pocket the difference.
Change the channel on Netflix
And now visiting the opinion of Australian investment banker Macquarie, we come to Netflix, which according to StreetInsider.com just got initiated down under with an underperform rating and a $50 price target suggestive of 17% downside. Why?
Calling Netflix "a price taker in an increasingly competitive market" where content is king, Macquarie warns that the cost of acquiring popular movies and TV series for streaming is spiraling out of control. New rivals -- everyone from Apple, to Google, to Hulu, to Amazon -- have come out of the woodwork. And while on the one hand this obviously bids up the prices that Netflix must pay for content, it has other deleterious effects, such as the loss of exclusivity in the Epix contract, and the fact that a plethora of competing options is starting to siphon away subscriber growth at the original streaming firm, Netflix.
So much for the business. As for the stock, Netflix's 33-times-earnings valuation -- a number that rises to 62 based on forward estimates -- looks like the nail in the coffin for this stock's buy thesis, and a fine reason in and of itself for Macquarie to recommend a sale. Overpriced and outcompeted, it's starting to look like curtains for Netflix.
Not all Fools agree with this downbeat assessment, of course -- or at least, not entirely. Want to get a Fool's-eye view of all Netflix's pluses and minuses? Read our brand-new premium research report on the company. Get it hot off the presses by clicking right here. And as luck would have it, we happen to have another premium report geared up and ready to go for Intel fans. Find that one here.
Whose advice should you take -- mine, or that of "professional" analysts like Stifel, Longbow, and Macquarie? Check out my track record on Motley Fool CAPS, and compare it to theirs. Decide for yourself whom to believe.
