This Just In: More Upgrades and Downgrades
Mar 6th 2012 2:59PM
Updated Mar 6th 2012 3:02PM
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." While the pinstripe-and-wingtip crowd is entitled to its opinions, we've got some pretty sharp stock pickers down here on Main Street, too. (And we're not always impressed with how Wall Street does its job.)
Given this, perhaps we shouldn't be giving virtual ink to "news" of analyst upgrades and downgrades. And we wouldn't -- if that were all we were doing. Fortunately, in "This Just In," we don't simply tell you what the analysts said. We also show you whether they know what they're talking about.
All's not Wells at Annaly
Bad news first: The pessimism surrounding Annaly Capital Management just keeps growing. This morning, Wells Fargo removed its buy rating from the stock, downgrading Annaly to market perform. Wells warns that "NLY's longer-duration portfolio creates potential risks with rising longer-term rates, a potentially expanded HARP 2.0, and if the Federal Reserve institutes QE3."
Translated into English, what Wells is saying is that many of the mortgages Annaly has invested in are subject to refinancing through the government's Home Affordable Refinance Program, designed to help out homeowners with underwater mortgages. HARP is good news for the homeowners, allowing them to lower the cost of their debt payments. But it's bad news for Annaly, which will earn less from these payments, at the same time as its own borrowing costs are rising.
Wells thinks investors are better advised to eschew Annaly's 13.8% dividend yield in favor of the better "risk/return" at smaller Hatteras Financial (NYS: HTS) , which pays a not-insignificant 12.7% yield, but sells for a much lower P/E ratio.
Olly, olly, OmniVision!
On a brighter note, the analysts at Baird sounded the all-clear for OmniVision today. According to StreetInisder.com, Apple's (NAS: AAPL) decision to use Omni's camera sensors in the iPad 3 gives Omni two slots in the new tablet. The possibility that Apple will produce a mini iPad, potentially incorporating Omni's tech as well, gives rise to hopes for additional revenue for the stock -- and an upgrade to outperform from Baird.
A few months ago, I myself recommended investing in OmniVision based on the stock's strong earnings growth rate and low stock price -- a recommendation that quickly beat the market by 21 points.
Will OmniVision repeat that feat? It depends. At 11 times earnings and a growth rate still estimated at 15%, the stock still looks attractive. That said, OmniVision hasn't yet filed a cash flow statement for its recent third-quarter earnings, so it's hard to say whether free cash flow is keeping pace with GAAP earnings.
I'll be keeping an eye on this one, though, and will let you know what the 10-Q shows once it's filed. Add OmniVision to your Fool Watchlist, and make sure you're first in line to hear the news.
Mighty, mini Mitek?
In other camera-related news, JMP Securities initiated coverage of Mitek Systems this morning at an outperform rating. If you've never heard of Mitek, that's not surprising. At just $280 million in market cap, it's hardly a household name. But as time goes on, you're going to be hearing a lot more about this company.
Mitek, you see, specializes in software that helps smartphones "recognize" things in the pictures they take. It's for use in mobile banking. It interprets handwriting and numbers, for example, when scanning a check with your phone, for mobile checking deposits to your bank. These kinds of technologies are starting to become attractive to bankers... but should Mitek stock be popular with investors?
Call me a skeptic, call me a Fool, but I'm just not as enamored of Mitek as JMP seems to be. While I agree with the analyst that this technology seems to have legs, the company's share price -- 230 times free cash flow, and about twice that when valued on GAAP earnings -- seems too rich by far. The handful of analysts who follow Mitek only expect the company to grow earnings at about 25% per year over the next five years. Unless Mitek can surprise us and produce triple-digit growth to accompany its triple-digit stock price, I'm afraid I'm going to have to give this stock the thumbs-down.
Looking for a better way to make money from smartphones? Read the Fool's new -- and free! -- report: " 3 Hidden Winners of the iPhone, iPad, and Android Revolution ."
At the time this article was published Fool contributor Rich Smith does not own shares of, nor is he short, any company mentioned above. He does, however, have public recommendations available on five dozen separate companies. Check them out on Motley Fool CAPS, where he goes by the handle TMFDitty -- and is currently ranked No. 351 out of more than 180,000 CAPS members. The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Annaly Capital Management and Apple, as well as creating a bull call spread position in Apple.We 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.
Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.