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 the best
In all the history of the stock market, has there ever been a better investor than Goldman Sachs?
Well... actually... yes. Warren Buffett springs to mind, for example. And judging from the numbers we've dug up on Goldman Sachs' historical performance, this banker isn't exactly the bees knees when it comes to picking winning stocks, either. Nonetheless, an upgrade or a downgrade from Goldman does have the potential to move markets, and that's why today we're going to take a look at a couple stocks Goldman says it likes... and a few more it doesn't.
Calling the "pot" black
First up: PotashCorp (NYSE:POT). In an "initiation of coverage" note yesterday, Goldman cited "production curtailments amounting to about 15% of annual capacity and broad-based inventory destocking" as indicative that potash prices are "approaching a trough." According to Goldman, now begins a "multi-year" period in which PotashCorp begins to outperform the S&P 500 consistently. According to StreetInsider.com, which reported the rating, Goldman is setting a $46 price target on PotashCorp stock, and predicting 15% profits within a year.
Personally, I think that's a bit aggressive. Right now, PotashCorp is selling for more than 15 times earnings, but only expected to grow these earnings at about 3% per year over the next five years. As a general rule, it's not a great idea to go around paying double-digit P/E ratios for single-digit growers. As a result, I'm calling shenanigans on Goldman's PotashCorp endorsement. It just doesn't hold water.
Be that as it may, Goldman is forging right ahead with a second fertilizer endorsement this week, predicting that "the estimate revision cycle is inflecting" for PotashCorp archrival Mosaic (NYSE:MOS) as well. Arguing the Street underestimates the company's "phosphate earnings power," and citing the same reduction in inventories that it sees working to PotashCorp's benefit, Goldman thinks investors should be "aggressive buyers" of Mosaic stock today, before the turnaround becomes apparent.
Again, I disagree. At more than 13 times earnings, but only 8% projected earnings growth, Mosaic poses the same problem faced by PotashCorp bulls: the prospect of paying double-digit P/E ratios for single-digit earnings growth. Now granted, Goldman says these numbers are irrelevant, because the economics of fertilizer is about to turn, and Mosaic will grow faster than anyone else expects. But how good has Goldman been at calling these kinds of "inflection points" in the past?
Turns out, not very good at all. On CAPS, we've been monitoring Goldman's performance in the chemicals sector for upwards of six straight years now. Over that time period, Goldman has twice recommended buying PotashCorp, and twice recommended buying Mosaic. It's been wrong all four times. (Don't believe me? Here. See for yourself).
Now, on the other hand, one thing Goldman has been a bit more accurate about in the past, is its picks of nitrogen fertilizer makers -- and as it just so happens, Goldman's got a few things to say about those this week, as well.
You see, at the same time as Goldman was throwing its support behind PotashCorp and Mosaic, it was panning the prospects of nitrogen specialists Agrium (NYSE:AGU) and CF Industries (NYSE:CF). (Strangely, peers Rentech (NASDAQ:RTK), and its most important subsidiary, Rentech Nitrogen Partners (UNKNOWN:RNF.DL), seem to have escaped Goldman's notice for the time being -- but I suspect they'll get around to panning those to as well, presently).
According to Goldman, nitrogen "fundamentals" have peaked, and there's little "potential for improved execution/margin upside" left at either Agrium or CF. Predicting higher natural gas costs in 2013, and lower ammonia/urea prices, Goldman sees CF profits coming in 14% below consensus in the coming year. Consequently, Goldman is advising its clients to go neutral on Agrium, and sell CF.
There may be something to this advice. At nearly 12 times earnings, Agrium shares do look overvalued relative to the sub-6% growth prospects that Street analysts assign to the stock. CF, meanwhile, sells for 7.6 times earnings. That looks even more overpriced relative to "growth" rates that, at less than 2%, are projected to actually fall below the rate of inflation.
To sum up, when Goldman tells you to avoid companies that focus on selling nitrogen as crop fertilizers, that's some advice worth listening to. Truth be told, each of Agrium, CF, and Rentech looks expensive, and I wouldn't touch any of these farmers' helpers with a 10-foot hoe at today's prices.
On the other hand, neither Mosaic nor PotashCorp appear to offer much more safety -- at least not according to the numbers we're seeing them report today.
If it's a decent play on fertilizer you're looking for, I think the only stock really worthy of consideration right now is Rentech Nitrogen -- the subsidiary of Rentech proper. That one's growing at 12%, selling for 15 times earnings, and paying a very attractive dividend yield of 8.7%. Even if Goldman's right about the poor prospects for nitrogen going forward, Rentech Nitrogen looks to offer a big enough margin of safety to be worth the risk.
Fool contributor Rich Smith has no positions in the stocks mentioned above. The Motley Fool owns shares of CF Industries Holdings. 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.