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're going to try and 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 …
Just in time for the Easter holidays, Chinese Internet star SINA
According to Goldman, the analyst's concerned about valuation. "Expectations that [Sina's version of Twitter] Weibo will evolve from a social media into a fully fledged social network" have helped double Sina's stock price this year. But the shares now "more than fairly reflect [Weibo's] potential." And while a fair valuation might seem to argue in favor of Goldman's maintaining a "neutral" rating on the stock, the situation is actually worse than it appears at first glance.
Goldman warns that Weibo in particular is facing "tougher competition" from the likes of Youku.com
Let's go to the tape
Judging from our CAPS stats, the answer to both may be "yes." More than a year's worth of data places Goldman within the top 10% of investors CAPS tracks. Of course, the company's not perfect, even in SINA's Internet Software and Services category. Goldman recommended buying Google
On the other hand, the banker's single best call on record is also in the that same industry, where a recommendation to purchase Baidu back in February 2010 wound up outperforming the S&P 500 by more than 221 percentage points.
Granted, I don't expect Goldman to book another 200-point gain with SINA. For one thing, it's mathematically impossible -- unless, perhaps, you're interested in shorting. But I do agree with Goldman that holding SINA is a risky bet.
The company didn't give investors a free cash flow number when it reported earnings last month. However, SINA's management did let slip that "cash flow from operating activities for fiscal 2010 was $116.6 million." We also know that SINA has averaged $13 million in annual capital expenditures over the past five years. If we take that number as our best estimate for fiscal 2010, it would leave the company with free cash flow of more than $103 million.
That means SINA trades for perhaps 80 times free cash flow. If it generates as much cash as it did last year for every single year in the foreseeable future, you'd still need 80 years to recoup the cost of buying one share today. Raise your hand if you think that sounds like a good deal.
Sure, a growing SINA is likely to make you back your initial investment in less than eight decades. But even at an 18% growth rate, it's gonna take a while. What's more, at 80 times free cash flow, Sina costs more than Google or Sohu, and maybe even more than Youku (although that company hasn't released a current cash flow statement yet). It's cheaper than Baidu, but also much slower-growing.
In short, Goldman's probably right about this one. If you're in the market for growth stocks, Internet stocks, China stocks, or even all three, you'll find better bargains elsewhere. Like Goldman, I'd advise you to sell SINA, and use the money to buy something better.