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." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.
But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we'll be tracking the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.
Survey says ,..
Thursday is shaping up to be a bad one for VMware
Investors are taking all this advice to heart, and the stock's down 20% as of this writing. But should they?
Let's go to the tape
At the risk of sounding contrarian: No. More often than not, when Wall Street analysts start agreeing on stuff, that's your clue to head the other way. And rarely have I seen a case of Wall Streeters jumping faster to the wrong conclusions than in this morning's flurry of downgrades against VMware.
Even more telling, I submit to you, is the fact that the analysts turning against VMware today have records that are highly suspect at best. Consider that in CAPS:
- JPMorgan achieves just 48.5% accuracy on its picks, outperforming only 79% of investors tracked by CAPS (precious few of which run their own investment banks).
- Jefferies does even worse. According to our records, the analyst gets just 46% of its picks right.
- And Lazard lags the pack with a record of just 42% accuracy.
Not a one of these worthies has a record placing it in the CAPS All-Star stratum of investors outperforming 80% of their peers. To the contrary, both Jefferies and Lazard have records so bad, we hide 'em behind the fig leaf of an "Under 20" CAPS ranking.
This year alone, Lazard has already lost 49 points to the market with its recommendation to sell Trina Solar
And mighty JPMorgan? See for yourself:
|
Stock |
JPMorgan Says: |
CAPS Says: |
JPMorgan's Pick Beating (Lagging) S&P By: |
|---|---|---|---|
|
Dell |
Underperform |
** |
(12 points) |
|
CME Group |
Underperform |
**** |
(47 points) |
|
Alcoa |
Outperform |
**** |
47 points |
I've got to give JP props for its prescient call on Alcoa -- picking the metals magnate on the cusp of one of the greatest recessions in living memory was a gutsy call, and it's paid off big. But at the same time, I'd offer JP a word of advice: Careful with those downgrades. They can turn around and bite ya.
Speaking of which...
Don't be surprised if today's pessimistic ratings on VMware turn around and nip these bankers in the scorecard a few months from now. I mean, sure -- management warned that fiscal second-quarter revenue will be flat-to-down from last year's second quarter. But is one quarter's weakness reason to jump ship on the stock?
Seriously, folks, VMware just finished reporting a stellar first quarter of cash production. Over the past 12 months, it's generated $747.7 million in free cash flow (operating cash flow less capex), which means that investors today are valuing VMware's enterprise at 15 times its trailing free cash. And that metric means you're not even paying for the firm's $1.5 billion in net cash.
Maybe VMware is headed into a rough Q2, maybe not. (Predicting the future is always a dangerous game.) But if the overwhelming consensus of Wall Street analysts proves correct, if VMware manages to grow at 20% per year over the next five years, then today's sell-off has handed us an admirably cheap price at which to start a position.
Foolish takeaway
Would I sell VMware now (if I owned it)? Not a chance. To the contrary, I very much expect I'd be buying more.
