This Just In: Upgrades and Downgrades

For semiconductor investors, 2015 has been a good year.

Over the past 11.5 months (and counting -- semis are up another 1% in early Tuesday trading), shares of the SPDR S&P Semiconductor ETF have gained a good 8% in price. That may not sound like much -- but it's three times the average gain on the S&P 500.

And yet, these gains have not been shared equally. Micro-electro mechanical systems specialist Analog Devices (ADI 2.67%), for example, is up less than 4% year to date. Texas Instruments (TXN 1.71%) has notched a more respectable 7% gain, very close to the average in its industry. And yet, up until this morning, TI was actually neck and neck with Analog Devices, and lagging the industry. So what changed today?

Texas Instruments got an upgrade. And Analog Devices got downgraded.

The news at 57
It's a fact of pure coincidence, but both the shares of Texas Instruments (market cap of more than $58 billion) and those of Analog Devices (market cap of less than $18 billion) currently cost about $57 and change. But according to the analysts at Oppenheimer, that's where the similarities end.

This morning, the banker announced it's upgrading shares of Texas Instruments to outperform, and assigning a new $70 price target that implies 21% profits potential for investors who buy the stock today. According to the analyst, "TXN is levered to some of the fastest growing and sexier end markets within the sticky, high margin automotive segment," which provides about 15% of the company's revenue. This business has been showing "double-digit growth in each of the last two years" and, according to StreetInsider.com, Oppenheimer believes that "this growth is sustainable long term, as average semiconductor content outgrows vehicle units at least 2x over the next decadeplus."

Thus, a company that turned 85 years young in 2015, still looks to have a bright future, and one that will be characterized by "gross margin expansion," "higher fab utilization," and strong returns to shareholders from share buybacks and dividends.

And Analog?
Not so Analog Devices. According to Oppenheimer, Analog Devices' "core businesses" exhibit both "stickiness and stability" (in a good way). But Analog Devices' consumer focus makes the company's revenues too "volatile" for Oppenheimer's tastes. Together, that adds up to a downgrade to neutral in Oppy's estimation. And the analyst has pulled its price target completely, to boot.

In particular, Oppenheimer worries that Analog Devices depends too heavily on just one company (rhymes with "Snapple") for its revenue, and that weak sales of the new iPhone 6S, and uncertainty about future incorporation in upcoming iPad generations, both bode poorly for Analog Devices' business in the near term.

Which raises the question(s): Is Oppenheimer right to be optimistic about Texas Instruments? Is it right to worry about Analog Devices?

Let's go to the tape
Well, we've got good news and bad news on that front. Turns out, Oppenheimer is very likely wrong about both Texas Instruments and Analog Devices.

You see, at Motley Fool CAPS, we've been tracking Oppenheimer's performance as an analyst for nearly a decade now. What we've learned over this time is that Oppenheimer is at best a middling sort of analyst. Ranked no higher than the second quintile of investors globally, Oppy gets the majority of its stock picks wrong -- and it's particularly bad on semiconductors.

Although semiconductors is the fourth most-recommended sector that Oppenheimer covers, it's far from this banker's forte. If Oppy gets only 41% of its stock picks right in general, its record for accuracy in semis is an abysmal 36%. Among the analyst's more notable misses:

So as you can see, a black mark from Oppenheimer is hardly the kiss of death for Analog Devices. Nor is a gold star from Oppy a guarantee of success for Texas Instruments -- not in the past, and not today either.

Valuing the semis
Rather than just take Oppenheimer's word on it, therefore, let's take a look at these stocks ourselves, and see what we come up with. Here's how the valuations of these four major semi players compare, one to another:

All data courtesy of S&P Capital IQ.

Evaluating Oppenheimer
As you can see from the above chart, Oppenheimer is broadly right in that it recognizes the overvaluation of Analog Devices, for example. At the same time, however, the fact that Analog Devices is so much more expensive than the other semi stocks discussed above, suggests Oppenheimer may have stopped too short in downgrading the stock only to neutral. With ADI costing more than twice our target valuation of 1.0 times EV/FCF/G, a sell rating may actually be more appropriate here. (And as for Texas Instruments, yes, it is a bit cheaper than Analog Devices -- but still not cheap enough to make the stock an obvious buy.)

Turns out, better values may be found among Oppenheimer's historical "mistakes." NVIDIA, for example, looks cheaper than either of the two stocks Oppenheimer examined this week. Tiny FormFactor -- cash-rich, debt-free, expected to grow briskly, and swimming in free cash flow -- may actually be the best pick of all.

Long story short, I see little reason to follow Oppenheimer's stock advice on semiconductors this week. But its past picks may have more merit.