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." 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 worst and sorriest, too.

And speaking of the worst ...
Buoyed by hopes of a resurgence in infrastructure spending at AT&T (NYSE:T), Sprint Nextel (NYSE:S), and Verizon (NYSE:VZ), Thomas Weisel upgraded shares of optical equipment maker Ciena (NASDAQ:CIEN) to "overweight" yesterday. Weisel's investment thesis consists of two main parts: First, it believes that Ciena's revenue will benefit from the "major optical upgrade cycle" under way at the major telecoms. Second, it believes that with greater revenue will come greater "operating leverage" for Ciena, creating an "earnings acceleration opportunity."

Sounds promising, doesn't it? But there are a couple of interesting bits of trivia about this latest upgrade that make it both more and less attractive for investors. I'll get to those in a minute. First, let's take a look at Weisel's record, and get an unbiased view of just how good a stock picker this firm is.

Truth be told, Weisel looks somewhat the worse for wear since I last profiled it. Last month, as you may recall, Weisel was standing on the precipice, teetering between having a record good enough to display in public, and one not. Long story short, Weisel fell off the wrong side. Its CAPS score dropped below our 20-point cutoff, and will now be hidden from view to avoid undue embarrassment, until such time as Weisel redeems itself. What you can still see, though, is that Weisel's no longer making more right calls than wrong -- with an accuracy rating now fallen to just 38%, it's wrong nearly twice as often as it's right.

A few of those unfortunate calls:

And now for the promised trivia. Good news first -- in making its buy recommendation, Weisel projects $1.01 per share in pro forma profits for Ciena this year. The fact that this is below consensus analyst estimates of $1.05 per share suggests things may turn out even better than Weisel hopes in the near term.

But then there's the bad news. As Weisel makes clear in its research note, it's been predicting this same "uptick" in optical spending since April of last year, when it described the industry as being "in the middle of a secular growth cycle." And how has Ciena's stock performed over the course of that year, you ask? It's up just 5% -- lagging the S&P's climb by a good nine points. Stranger still for a firm supposedly sitting in the "middle" of a cycle for the past year, Weisel doesn't expect Ciena to begin seriously benefiting from operating leverage until fiscal 2008 (in which year Weisel predicts earnings 10% higher than the consensus of its peers).

Foolish takeaway
I certainly admire Weisel's trying to take a long-term view here. However, its record -- both its overall record reflected on CAPS, and its specific call on the "secular growth cycle" in optics -- suggests Weisel is not particularly adept at predicting the future. Before deciding whether to heed its advice on Ciena, perhaps you'd like a second opinion on the stock?

If so, then I'd suggest that between now and when you press the "buy" button, you detour over to CAPS to peruse what the current score leader on Ciena has to say about the company. With two picks on the company beating the market by a total of 22 points to date, he seems to know a thing or two that Thomas Weisel perhaps doesn't. Click here to learn the identity of this mystery stock picker, and try not to look surprised when you find out he (she?) is not a Wall Street analyst at all.

Fool contributor Rich Smith does not own shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked 320th out of more than 28,000 raters. The Motley Fool has a disclosure policy.