Get to Know a Guru

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." In our recurring column "This Just In," we cover the most headline-worthy upgrades and downgrades, testing the analysts' logic and examining their records to help you decide whether they're worth listening to at all. And in "Get to Know a Guru," we use upgrade and downgrade news as a springboard to introduce you to some of the lesser-known names in analyst-land. Up this week: investment banker Friedman Billings Ramsey (NYSE:FBR).

Profiles in punditry
Fashionista retailer and Motley Fool Stock Advisor pick bebe (NASDAQ:BEBE) took a tumble yesterday, and its stock is falling again today as I type. The apparent reason, as Foolish colleague Alyce Lomax highlighted yesterday: a downgrade to neutral from Friedman Billings Ramsey.

What's that, you say? Never heard of FBR? If that's the case, then you might want to perk up and pay attention to this one. In contrast with a couple of other analysts I've reviewed over the past couple of weeks, this appears to be one of the good 'uns.

Who is Friedman Billings Ramsey?
While not as famous -- and not nearly as big -- as some of its investment banking brethren, FBR is nonetheless a pretty familiar name in these parts. Headquartered in Arlington, Va., which is right in the Fool's neck of the woods, the bank regularly shows up in the business section of The Washington Post. We've even written about the bank as an investment from time to time -- profiling its ill-fated involvement in the subprime-mortgage sector, for example, and its attempt to break into the online discount-brokerage market.

We even have a profile of the firm worked up in Motley Fool CAPS, which describes FBR thusly:

Structured as a real estate investment trust (REIT), FBR has taxable subsidiaries offering investment banking, institutional brokerage, and asset management services. As part of their research effort, Friedman Billings has a team of economists and Capitol Hill veterans -- the Washington Policy Analysis Group -- that assesses the economic implications of regulatory and legislative trends. Research efforts are focused on the following sectors: consumer, diversified industrials, energy and natural resources, financial institutions, health care, insurance, real estate, and technology, media, and telecommunications. Coverage encompasses over 40% of the companies in the S&P 500.

Valued at just beyond $1 billion itself, FBR has big ambitions. According to its website, the firm's investment-banking group "completed 134 banking assignments with a total transaction value of more than $43.4 billion" in 2005 and helped to raise $22.8 billion for its clients. Citing industry researchers, FBR claims to have been "the No. 1 book-running manager of all U.S. common stock offerings for issuers with a market capitalization of $2 billion and under ... and the No. 9 book-running manager of all common equity capital raises for all U.S companies." Impressive.

Are these guys any good?
But enough about the firm's biography. What we really want to know about is its resume. There are a lot of ways to "be No. 1" after all -- business volume, number of deals, returns to investors -- and it's really that last one we want to focus on. As investors, we want to know whether we should bother listening when FBR speaks.

Actually, we probably should. Although FBR has a way to go before it can claim to be the "No. 1 best stock picker in the world" (in the world of CAPS, that title belongs to the Fool's own TMFEldrehad), as investment banks go, FBR's record is none too shabby. The bank sports a combined CAPS rating of 85.64 -- good enough to put it in the top 15% of investors on CAPS. Since we began tracking the firm in August of last year, FBR's winning picks have included such names as:

Admittedly, on the downside, the firm has also made some blunders:

Moreover, FBR does deserve an extra helping of shame for inflicting AeroVironment on investors, considering that the bank helped to bring that company public. Then again, it wasn't investors signing FBR's paycheck, and I imagine that company insiders would be more inclined to give FBR a pat on the back for bringing them top dollar on the IPO.

Meanwhile, back at bebe
So as a general rule, FBR seems to know its stuff. But what about the neutral rating it has assigned to bebe, in particular? According to the analyst, bebe's been plagued by bad fashion choices in its product offerings of late. FBR criticized the store's overly "sophisticated tops assortment" and lack of "depth in the casual business." Add in reports that bebe's sales have been especially slow in California, which bebe depends on for $1 out of every $4 of its annual sales, and the fact that bebe issued an earnings warning last month, and FBR certainly seems to have grounds for panning the stock. In fact, by dropping its rating no further than neutral, FBR may even be doing bebe a kindness.

For that matter, reviewing the stock in response to yesterday's big drop, Alyce largely agreed with FBR's factual assessment, saying that bebe has "definitely lost its way a little bit" and "needs to get its merchandise back on track." Where the two differ is that Alyce believes bebe can still "get its 'sexy' back" and prove a worthy investment over time. Find out why, in her column "Beating Up bebe Again." And learn why the folks at Motley Fool Stock Advisor like bebe, too, when you accept a free 30-day pass to the service.

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 No. 1,194 out of nearly 30,000 rated players. Nuance Communications is a Motley Fool Hidden Gems recommendation. The Fool has a disclosure policy.