This excerpt is from the Motley Fool’s
This Just In: Upgrades and Downgrades
By Rich Smith, discussing the upgrades on MEMC Elec (WFR) mentioned earlier.
"And speaking of the best …
Two of the biggest names in stock picking took an unorthodox view of MEMC Electronic Materials‘ (NYSE: WFR) disappointing second-quarter news last night. With the stock down 20%, both JPMorgan Chase and Citigroup now think this morsel is too tempting to ignore and issued twin upgrades to "buy." I couldn’t agree more.
The reasoning
We don’t know precisely what got JPMorgan up on MEMC this morning, but here’s what Citi has to say about the stock.
[W]e think this is finally the peak of the bad news with the stock … now possessing a unique combination of attributes: inexpensive, and finally set up to beat and raise headed into late ’08/early ’09. … [W]e think three key things … finally make this stock work going forward: (1) silane (an inherently difficult process to ramp and one in which very few companies around the world have deep expertise) is no longer the capacity bottleneck, (2) capacity to significantly beat is in the ground, and (3) valuation leaves significant margin for error.
The record(s)
Both JP and Citi rank in the top 15% of investors tracked at CAPS. Now, that doesn’t mean they’re always right — although when they are, the payoff comes in spades. In fact, Citi guesses wrong about as often as right, while JP’s record is a bit more encouraging — it calls its picks correctly nearly 52% of the time. A few examples from the semi-sphere: Charts here.
… But best of all, I suspect, will be these two megabankers’ score on MEMC Electronic Materials.
Foolish takeaway
Why? I’ll be honest with you, Fools: I don’t know "silane" from Silly Putty. (The Wikipedia entry on the stuff sure makes it sound complicated, though, and that supports Citi’s argument that its creation gives MEMC a moat.) Meanwhile, if you’ll pardon the mixed metaphor, the other two legs of Citi’s buy thesis hold a lot of water:
- First, on "capacity to significantly beat": MEMC warned that its Q3 revenues will range from $560 million to $620 million — the midpoint of which falls well short of Wall Street’s expected $616.3 million. Once the Street drops its expectations in response, though (and yes, it will), that still leaves MEMC with a possible $620 million sales quarter and a real possibility of beating expectations this time around.
- Second, on valuation: Right now, we’re looking at a stock priced at 16 times trailing earnings yet expected to grow its profits north of 27% per year going forward. Call me a wild-eyed optimist if you will, but it looks as though Mr. Market is pricing in a huge margin for error in this stock. If MEMC performs just half as well as most analysts currently expect, this stock is a bargain…."
