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." Here, 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.
Rahm Emanuel once advised the president to "never let a serious crisis go to waste. What I mean by that is it's an opportunity to do things you couldn't do before." This morning, the ace stock pickers at Raymond James have taken that advice to heart.
Not all telecom players suffered, of course. In fact, shares of Alcatel-Lucent
… and opportunity
The damage didn't end there. Monday's big losers included three companies that make their money developing, owning, and operating cell-phone towers -- the arteries through which telecom firms pump the wireless "blood" that keeps our calls from dropping. Investors believe that when AT&T buys T-Mobile, it will pick up that firm's network of cell-phone towers, expand its own call coverage, and hence have less need to build or lease new towers of its own.
If true, this would certainly be bad for the tower operators' business. But amid this crisis in confidence among investors, Raymond James spots an opportunity to profit. The analyst recommends buying shares of American Tower
Raymond James assigned all three stocks its highest "strong buy" recommendation. And while it isn't the most talkative stock picker, the few picks it has let slip over the years have tended to beat the market handily. At last report, more than 72% of Raymond James's recommendations were beating the S&P 500's performance.
So while we don't know precisely what attracted the analyst to these three stocks, the fact that they fell so hard this week tells me they probably deserve a quick look-see.
At first glance, it's hard to explain Raymond James's enthusiasm for these three stocks in particular. With P/E ratios that range from a "low" of 54 (American Tower) to a high of infinity (thanks to Crown Castle's and SBA's losses), these supposed bargains are anything but obvious.
But look a little closer, and you start to see what attracts the analyst. SBA generates $135 million in annual free cash flow, even as it reports "losing" $195 million under GAAP accounting statistics. Crown Castle tells a similar story: $311 million in GAAP losses, $375 million in positive free cash flow. Best of all is American Tower, which earned $373 million last year, whilst churning out nearly twice as much free cash flow -- $674 million.
Perhaps that's why Raymond James is so enthusiastic about these stocks. Valued on their free cash flow, the three companies all trade within a whisker of each other's valuations. SBA shares sell for 32 times annual free cash flow, Crown Castle fetches a multiple of 31, and American Tower is the cheapest of the lot at 29 times FCF.
Foolish final thought
I should add that these numbers also help explain why the ubergrowth investors at Motley Fool Rule Breakers have picked only one of Raymond's faves to outperform the market: American Tower. At 29 times free cash flow, American-T's not only the cheapest of the bunch -- it's also got:
- the smallest amount of net debt relative to its market cap
- and the fastest growth rate by far.
According to the analysts who track it, American Tower is destined to grow its earnings nearly 25% per year for the next five years. Weighing all the other factors into consideration, that has Rule Breakers betting it's the best bargain of the bunch -- and I agree.
American Tower is a Motley Fool Rule Breakers selection, but Fool contributor Rich Smith does not own (nor is he short) shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 521 out of more than 170,000 members. 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.