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.
And speaking of the best ...
As we headed into the extended weekend last week, U.S.-economy bulls got a bit of a shock. KeyBanc Capital Markets pulled its bets on the American consumer Friday, downgrading three key credit card companies to "hold" on fears that the economy is falling apart even faster than we had thought.
Citing a rapid deterioration in credit card purchase volume at Bank of America
Should you toss them as well?
Let's go to the tape
With roughly 49% of its picks beating the market, I hesitate to call KeyBanc Capital Markets one of the "best" stock pickers on Wall Street. Honestly, you should be able to flip a coin and do better than that. The sad fact, though, is that many bankers have done a really bad job of predicting the market mayhem recently, and KeyBanc's performance actually looks pretty good relative to the competition.
This banker's called the downturns correctly at consumer-sensitive stocks like Circuit City, Pier 1, and Las Vegas Sands
Even better, the analyst's best pick ever -- or at least, its best pick since we began tracking KeyBanc's performance more than two years ago -- was on MasterCard itself. KeyBanc's been bullish on the stock since way back in December '06, racking up more than 67 points' worth of market outperformance as a result.
And yet ...
Still, that 49% accuracy rating nags at me. I mean, sure, KeyBanc called MasterCard right. But was that really such a tough call? It's seems patently obvious that the developed world is "going digital" in many ways, and that money is no exception. In the long term, any company that plays to this trend should prosper. The trick will be buying these firms at the right price.
In that regard, I find it especially discouraging that KeyBanc has failed to pick the right price on two of its three downgrades of last week. Yes, they called MasterCard right once upon a time. But on both Visa and Heartland, KeyBanc's performance has basically tracked the market.
(They're actually down a couple of points on each.) At the risk of pointing out the obvious, seeing KeyBanc go one-for-three on its card picks doesn't really fill me with confidence.
To be painfully honest, after reviewing the financials of last week's three downgraded stocks, I'm at a loss on at least one of them. The massive costs incurred by Visa and MasterCard from their twin litigation settlements last year makes it difficult for me to figure whether either one is worth owning. I'm pretty sure Visa is no bargain because, in addition to its 82 P/E ratio, the company continues to report anemic free cash flow -- yielding a triple digit price-to-free cash flow ratio. To me, the price is pretty clearly "not right" on that one.
MasterCard has no trailing P/E (because of the litigation charge), but from a free cash flow perspective, the stock looks fairly valued at 18 times trailing free cash flow, against a long-term growth rate pegged at just less than 18%. I'd be willing to take a flyer on that one today, even though at first glance, it doesn't look like a bargain.
What really gets me excited, though, is Heartland Payment Systems (incidentally, a Motley Fool Hidden Gems pick). Analysts expect this "little" (it's the nation's sixth largest) payment processor to grow at upwards of 20% per year over the next half decade. Yet the stock's trading for less than a 15 P/E, and barely 8 times free cash flow.
Heartland's carrying a little bit of debt, but certainly nothing unmanageable -- nothing that causes me to question whether it will survive the recession and go on to deliver its expected growth on the other side.
To me, Heartland Payment Systems looks downright dirt cheap -- and KeyBanc looks bad for downgrading it on short-term concerns. If I were to take advantage of one of the three stocks hit by last week's downgrades, this is the one.
Fool contributor Rich Smith does not own shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 1247 out of more than 125,000 members. The Fool has a disclosure policy.