Saturday, December 22, 2012

This Just In: Upgrades and Downgrades

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.

Atlantic Power could idle...
Just one week after Forbes magazine declared Atlantic Power Corp (NYSE: AT  ) to be "crowded with sellers," the stock may have reached an inflection point. Yesterday, analysts at local Canadian investment banker BMO Capital Markets announced�they were initiating coverage of the stock.

Admittedly, the most BMO would say in the company's favor was that Atlantic deserved a "market perform" rating, and an $11.50 price target. After the spike in share price that followed BMO's initiation, the shares are already trading within pennies of that target price. So why would investors consider buying Atlantic Power, if there's no upside to be had?

One word: dividends.

Every year, Atlantic pays out a heaping helping of dividend checks to its shareholders. In fact, for investors partial to immediate gratification, Atlantic pays its dividends monthly -- rather than making folks wait around a full three months for their payout as most American utility companies do with their dividends. Bonus points: Atlantic's full-year dividend yield of 10.6% is more than twice the payout at U.S. utilities Duke (NYSE: DUK  ) , Dominion (NYSE: D  ) , or American Electric Power (NYSE: AEP  ) .

Now, when you consider that 10.6% is just about the average annual return for the S&P 500, historically, and that this 10.6% comes in the form of a steady dividend check, arriving monthly, there's a fair case to be made for buying Atlantic... even if the shares themselves aren't likely to gain much value over the next year. But in fact, the situation may be better than that.

...or it could Power ahead
Just last month, you see, another analyst -- Desjardins, this time -- came out with an honest-to-goodness buy rating on Atlantic. What's more, when Desjardins made its buy rec, the shares were selling for $12.24 apiece-- more than they fetch today, and even more than what BMO projected they might sell for a year from now. So, in addition to Atlantic's generous dividend, there might even be some upside in the shares themselves.

What's the catch?
There is, of course, always a catch -- always a flaw in any stock you look at. In Atlantic's case, the catch is that while Atlantic pays a nice dividend, it's hard to say how it manages to pay for it -- given that the company's currently unprofitable; indeed, it has only earned a full-year GAAP profit once in the past five years. (From a free cash flow perspective, furthermore, Atlantic is currently burning gobs of the stuff -- $262 million up in flames over the past 12 months).

On the plus side, though, most years, Atlantic actually does generate plenty of cash. Also, through thick and thin, lean years and fat, the company has managed to maintain its dividend payments in the past, and even has grown them most years. (Whether it can keep all the balls in the air in the future, with no profits to support them, remains an open question.)

Foolish final thought
Personally, it gives me the willies to contemplate investing in a company with no profits, and currently no free cash flow, all in the hope of receiving a dividend check (or even 12 of them)... when I'm at a loss to figure out how the dividend gets paid.

If you've got similar concerns, you might want to pass on Atlantic for the moment, and consider instead another analyst recommendation entirely. For example, at the same time as BMO was hemming and hawing over Atlantic yesterday, Goldman Sachs came out with a full-throated endorsement of Sirius XM Radio (NASDAQ: SIRI  ) , which it now rates a buy, and says could go to $3.50 within a year.

As different from Atlantic as night is from day over the Pacific, Sirius XM is in the "sexy" business of selling satellite radio service, rather than humdrum electric power. More importantly, Sirius is both profitable and generating positive free cash flow -- $3.4 billion in GAAP net profits, in fact, and $632 million in free cash flow over the past 12 months.

At a valuation of less than six times net profit, and 24.4 times FCF, and a projected profit growth rate of close to 28%, Sirius may not pay a 10.6% dividend... but it's certainly got growth potential.

One thing that neither Atlantic not Sirius has going for it: The Motley Fool's chief investment officer has selected his No. 1 stock for the next year, and neither of these firms made the cut. Find out who did in our brand-new free report: "The Motley Fool's Top Stock for 2013." I invite you to take a copy, free for a limited time. Just click here to access the report and find out the name of this under-the-radar company.

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