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 worst ...
Citing "too aggressive" expectations from Wall Street, a continuing slump in the retail clothing sector, and its own pessimistic earnings forecasts, Wall Street Wizard Caris & Co. downgraded shares of Under Armour
Hurray!
Hurray?
Yep. If you've heeded the advice of our analysts at Motley Fool Hidden Gems and Rule Breakers, and already bought shares of Under Armour, then today's the day to shout "hurray!" -- because when it comes to finding winners and panning losers, there aren't all that many professional pundits with records worse than Caris.
Let's go to the tape
According to our records at CAPS, where we've been tracking Caris' performance for more than two-and-a-half years now, this analyst has historically achieved only 44% accuracy on its recommendations -- and that's the good news.
The bad news is that Caris appears to do even worse than its own less-than-stellar average when recommending retail clothing stocks. To date, the banker has only a handful of retail picks in its "wins" column, including active recommendations:
|
Caris Says |
CAPS Says |
Caris' Pick Beating S&P By |
|
|---|---|---|---|
|
Nike |
Outperform |
**** |
26 points |
|
Chico's FAS |
Outperform |
** |
39 points |
|
Pacific Sunwear |
Underperform |
*** |
43 points |
In contrast, a half-dozen of Caris' active retail picks remain underwater, for example:
|
Caris Says |
CAPS Says |
Caris' Pick Lagging S&P By |
|
|---|---|---|---|
|
Columbia Sportswear |
Underperform |
*** |
6 points |
|
bebe stores |
Underperform |
** |
25 points |
|
lululemon athletica |
Underperform |
** |
16 points |
Dig through the archives of Caris' "dead-and-buried" recommendations, and the numbers just get worse -- winners (such as bebe and Guess?) are more than offset by losing recommendations, the most important of which is, of course ...
... Under Armour itself
In early November 2007, Caris recommended that investors buy shares of the cutting-edge sportswear maker, but the advice -- and the timing -- couldn't have been worse. Under Armour went on to lose 36% of its value over the next 8 1/2 months. By the time Caris finally put this pick out of its misery in late July, the company had underperformed the S&P 500 by nearly 23 percentage points.
With a record like this one, I think you'll understand why I view Caris's counsel to sell Under Armour with a jaundiced eye today.
Sure, Under Armour doesn't exactly scream "Buy me!" at today's prices: a 24.3 price-to-earnings ratio, but consensus estimates of long-term growth at only 20%. True, too, UA has a history of reporting free cash flow far weaker than its GAAP net income. Over the past five years, the company has consistently reported strong GAAP earnings -- but generated positive free cash flow in only two of these years. And until the stock price fully reflects these realities, I personally will not be buying shares. That said:
- Last year saw Under Armour producing its most robust free cash flow ever -- nearly $31 million when all was said and done.
- Management promised it would get a better handle on its bloated inventories last year, and it delivered on that promise last quarter.
- The better a job UA does at keeping its cash from getting tied up in unsold inventory, the better its cash generation will look in future quarters.
Foolish takeaway
When all's said and done, I'm convinced that UA is moving in the right direction these days. The stock may not yet be cheap enough to buy, but the positive developments in cash flow and the negative position that Caris is taking is making things look interesting. Personally, if I were a shareholder, I'd be holding right now and looking to buy more on either:
- An improved (lower) stock price, or
- Further improvement in inventories, leading to improved free cash flow.
And if wishes were fishes, preferably both.
