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." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
And speaking of best (and worst)...
Yesterday was a big day for anyone investing in energy, and the companies that pipe it into our homes. In a trio of ratings, analysts at a trio of firms panned coal miner Peabody Energy (NYSE:BTU), praised Duke Energy (NYSE:DUK), but gave alt-energy pioneer Capstone Turbine (NASDAQ:CPST) only a shrug. Want the details? We've got 'em all here for you, beginning with...
Crushed by an energy market that seems gung-ho for natural gas, and totally unenthused by coal, shares of miner Peabody Energy have struggled this past year, and vastly underperformed the gains seen elsewhere on the S&P 500. In recent weeks, however, the shares have staged something of a rally, rising 27% after testing their lows on Oct. 3.
That's been great news for investors who bought at the bottom, but yesterday, analysts at Goldman Sachs counseled against getting greedy. After the run-up, Goldman argues that "risk/reward for [Peabody] shares appears more balanced." While the analyst still thinks we'll see steel production pick up in China, and believes that "domestic thermal coal inventories are slowly falling" -- improving the pricing power of coal producers -- a 27% gain is still worth two in the bush, and Goldman thinks now's a great time to take some profits and wait for another pullback.
They may be right about that. While Peabody is inarguably cheap on a P/E basis, the company's still slated for just 2.5% annual profits growth over the next five years. It's still hip-deep in debt with about $5.7 billion more debt on its balance sheet than it has cash on hand. Add in the fact that Peabody rarely generates free cash flow at levels approaching its reported net income, and there seems to be plenty of risk left in the stock at today's prices, and maybe not a whole lot of reward.
Duke crowned again
Meanwhile, at the same time that Goldman counseled moderation on coal miners, one big coal user -- Duke Energy -- was getting its second endorsement from Wall Street, in as many weeks. Last week, megabanker Citigroup upped its rating on Duke to "buy." Yesterday, big-banking peer JPMorgan Chase added its voice in support of Duke stock.
And what a voice it was. In a 180-degree reversal of its prior opinion on the electric utility, JP yesterday upped Duke all the way from "underweight" to "overweight" -- from "sell" to "buy." With its new $71 price target, JP is essentially promising investors a 9% return on their money from buying Duke today. And when you add in Duke's 4.7% dividend yield, that works out to a very nice total return indeed -- nearly 14%.
Problem is... it isn't going to happen. Priced north of 19 times earnings, Duke offers investors a much less attractive valuation than Peabody sports. Meanwhile, the utility's projected growth rate -- just 3% -- really isn't all that much faster than what we see at Peabody. Perhaps most disturbing of all, while Peabody may often generate lower free cash flow than what it claims to be "earning" under GAAP, Duke isn't actually earning any cash profits at all. To the contrary, examine Duke's cash flow statement, and what you'll find is that over the last 12 months, Duke actually burned $720 million in cash -- even as it claimed to be earning nearly $1.5 billion under GAAP.
Long story short, I'd rather be short Duke than long.
Looking for an alternative to traditional utilities to invest in? Look no further than tiny turbine maker Capstone Turbine, which earlier this week trumpeted a deal to provide seven megawatts worth of gas turbines to a quote-unquote "major oil and gas customer operating on shale gas." Who shall presumably remain nameless.
This news was enough to grab the attention of analysts at Roth Capital, which initiated coverage of Capstone yesterday. It wasn't, however, enough to get the analyst to actually recommend buying the stock; instead, Roth stuck Capstone with a "neutral" rating, and a prediction this $0.97-per-share company will rise all of $0.03 to hit a buck a share 12 months ago.
Could this mild endorsement prove conservative? Perhaps, if Capstone can ever figure out a way to earn some profits, or at least generate a bit of cash, from its business.
As long as we've been watching this stock -- since way back in 1997 -- Capstone has remained a perennial money-loser, and a cash-burner. Never reported a penny in GAAP profits. Nary a cent's worth of positive free cash flow, either. That said, the company's latest earnings report showed Capstone burning the least amount of cash in its history -- about $17.5 million in total. With $45 million in the bank, and zero debt, the company isn't exactly a sure thing yet. But it's got cash enough to keep it afloat for another couple years, at least, while it tries to break into the black.
Fool contributor Rich Smith does not own shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 300 out of more than 180,000 members.
The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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