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 best ...
Shares of Motley Fool Stock Advisor recommendation Amazon.com (NASDAQ:AMZN) are fighting the rising tide of red on the markets today, buoyed by an upgrade from CAPS All-Star analyst Bernstein. (And because it's a pretty common name in financial circles, let me clarify that this Bernstein is an arm of investment manager AllianceBernstein (NYSE:AB), which is in turn owned by Parisian insurance giant Axa (NYSE:AXA).)

The thesis behind Bernstein's upgrade from "market perform" to "outperform" can be summed up in one word: scale. According to Bernstein, Amazon owes its near-tripling in stock price over the past 52 weeks, as the market struggles to maintain even double-digit gains, to "positive revenue surprises." But Bernstein sees this as only the start of the story. For with greater revenue should ultimately come greater scale, and the ability to deliver improvement in profit margins earned on those mongo revenues. Additionally, Bernstein sees Amazon benefiting more and more from commissions earned on third-party sales secured on its site. Peering into the future, Bernstein predicts Amazon will nearly double the operating margin earned on its surging sales, to 6.2% by 2011.

Of course, predicting margin improvement at Amazon has been an active pastime of market pundits for years (we've even dabbled in it  ourselves). And as you know if you own the stock, Amazon hasn't always been able to deliver the goods (in this sense, at least). So how likely is it that Bernstein will be the firm that's finally proven right about Amazon and its margins?

Let's go to the tape
It could happen. While Bernstein isn't exactly the best stock picker in the universe, its 90.77 CAPS rating is none too shabby, and the firm's record of getting nearly seven calls out of 10 correct is the envy of more hit-or-miss players such as Citigroup and JP Morgan. Clearly, this firm knows what it's doing. Reviewing a few of its recent picks, we find Bernstein right on the money with:

Of course, even the best investors make mistakes. Bernstein's have included:

Personally, I have to admit that Amazon.com's valuation gives me the willies. A triple digit P/E? I remember the last time stocks were commonly fetching triple digits (in 2000), and I remember that things didn't go so well for a lot of these stocks.

That said, three facts suggest to me that Bernstein might be as right about Amazon as it has usually been about other stocks. First, Bernstein's record. Second, the fact that as nosebleed as Amazon's P/E may look, its price-to-free cash flow ratio is actually a bit more reasonable. The stock sells for a rich 47 times free cash flow -- still pricey in relation to 23% projected annual earnings growth, but not quite as bad as the 110 P/E suggests.

Third and finally, as I mentioned above, Amazon.com is a recommendation of growth stock super sleuth David Gardner. And David's picks have, on average, outperformed the S&P 500 by about 45 percentage points over the five years he's been picking them for Motley Fool Stock Advisor. Which makes the question here: Do you really want to bet against both Bernstein and David Gardner on this one? Much as I fear the valuation, I fear betting against winners more.

Want to get on the right side of David Gardner's trades? Take a free 30-day trial to Stock Advisor, and find out what he's buying today.

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. 255 out of more than 60,000 players. AllianceBernstein is an Income Investor recommendation. eBay is a Stock Advisor selection. Intel is an Inside Value pick. The Fool has a disclosure policy.