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’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.
Who’s hot, who’s not — in energy
Which companies will dominate the future of energy? Will it be old-line, developed-world oil-and-gas companies? Rising oil powers in the emerging market? How about the even trendier field of “alternative” energy, represented by solar power and rechargeable batteries?
SandRidge Energy Inc. (NYSE:SD)
When it comes to one oil-and-gas play, black gold may turn out to be fool’s gold — at least in the opinion of BMO Capital Markets, which yesterday downgraded shares of SandRidge Energy. Although the company has been making moves to lighten its dependence on natural gas and focus more on oil exploration, BMO says the stock is still “significantly overvalued” for its prospects. Indeed, while investors yesterday bid the shares up by nearly 2% (to $5.84), BMO think they’re headed the other way — and assigns the stock a $2 price target.
I agree. Not necessarily with the $2 price target, mind you. I don’t know what the stock is worth. What I do know, though, is that it’s not worth 31 times earnings. Not with a 7% growth rate, no dividend, and a consistent record of burning cash when it should be generating cash for its shareholders, it isn’t.
My hunch: This stock is worth a whole lot closer to $0, than to the nearly $6 a share investors are currently paying for it.
So, how about an oil stock a bit farther off the beaten path than North America? Brazilian oil giant Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) — “Petrobras” to its friends — scored an upgrade to “outperform” from the analysts at Credit Suisse Thursday, and a price target of $25 to boot. CS likes the company’s move to raise the price on the diesel it sells and thinks this might be the catalyst that marks an “inflection point” in the stock.
Unfortunately, I’m compelled to differ here. Sure, on the surface, Petrobras shares look attractive — I mean, P/E ratio of 12, 15% growth rate, and a 1.3% dividend? What’s not to like? — if you drill a little deeper, there’s actually some pretty glaring problems with an investment in Petrobras.
Problems like the fact that much like SandRidge Energy Inc. (NYSE:SD), Petrobras hasn’t generated one red cent worth of real free cash flow in the past five years. And the fact that with no cash coming into its coffers, Petrobras has had to fuel its 15% growth rate by piling on debt. The company’s currently $72.4 billion in hock (net of cash on hand), and the debt hole’s getting deeper by the day.
In short, Credit Suisse’s endorsement notwithstanding, I wouldn’t touch this one with a 10-foot drill bit.
MEMC Electronic Materials, Inc (NYSE:WFR)
Next up, the wave of the future that wasn’t: solar power. Prices on solar modules are down around the globe, and basically, no one is making money in this business… now. But according to the analysts at Goldman Sachs, this is just a temporary phenomenon. According to Goldman, MEMC’s basic semiconductor business is “steady-growth, cash-flow positive,” and worth $5 a share all on its own. If and when the solar biz ever turns around, therefore, buying a share of MEMC, which costs today only what the computer chip business alone is worth, gives you a “near-free call option” on a revival in solar.