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 its worst and sorriest, too.

And speaking of the best ...
Yesterday, I took investment banker Lehman Bros. to task for making (what I consider to be) a bone-headed call in endorsing ethanol magnates Aventine Renewable Energy (NYSE:AVR) and Verasun Energy (NYSE:VSE). Today, let me extend an olive branch by pointing out another upgrade authored by Lehman yesterday -- one with which I agree.

On Thursday, Lehman urged investors to buy shares of cell-phone maker Motorola (NYSE:MOT). In support of this advice, Lehman sketched out what appears to be a story of positive inventory divergence, saying the firm is "making progress reducing its inventory," while at the same time its component orders are "flat to up." In other words, the firm is selling off finished goods while stocking up on parts -- together, indications that sales are going strong and the company is preparing to fill further orders. There's still a wild card in the question of how much profit margin Motorola is earning on the sales, and indeed, Motorola itself doesn't expect to earn a profit from cell-phone sales until next year -- but other than that, things seem to be looking up.

Of course, at this stage all Lehman has to work with are educated guesses. Motorola might or might not confirm these guesses at its investor presentation next month, and the next round of earnings numbers aren't due out for another two months. In the meantime, we're left wondering just how good Lehman is at predicting the future.

Well, how good is it?
Actually, pretty darn good. Lehman boasts a CAPS rating of 88.86, despite accuracy that is little better than a flipped coin. And within this industry in particular, Lehman's record is simply stellar. Check out a few of its winning picks:

Judging from its record, Lehman's miscues tend to crop up in sectors other than telecom. Airlines, for example:

Foolish takeaway
Have I showered sufficient compliments on Lehman, to now take a few of them back? Because, I'm sorry, but just like yesterday, I simply cannot agree with the analyst on this one, for three reasons:

• Price. Selling for 25 times trailing free cash flow, and expected to grow its profits at less than 10% per year over the next five years, Motorola looks dreadfully expensive to me today. Now, I've owned the stock in the past, and made money on the trades -- but only when Motorola was selling for close to 10 times free cash flow. At 25, it's too pricey for me to own.
  
• Lehman's accuracy. I know the banker is close to the top of the CAPS rankings. I know it's a CAPS All-Star. But that 50% record for accuracy just gets under my skin. Why follow the advice of a firm with a 50/50 record of success, when flipping a coin gives you an equivalent level of accuracy?
  
• Lehman's record on Motorola. Listen, everything Lehman said about Motorola yesterday sounds logical. The story is good, and the stock should rise if Lehman's right. But the only past Motorola pick we have on record from this firm (and remember, CAPS is just 1 year old) was a disaster. Lehman recommended Motorola in November 2006 and closed out that position in February 2007. Yet those three months of wrongheadedness would have cost investors who listened to Lehman 22 points of market underperformance. Put it all together, and I just have no confidence that Lehman is calling this one right.

No, scratch that. Maybe Lehman is right. I just flipped a quarter myself, and it came up heads.

You know what Lehman says. You know what I say. Looking for a third opinion on Motorola? Click here to find out why -- I can't believe I'm saying this -- Jim Cramer is the investor with the best record to date on this stock.

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. 283 out of more than 60,000 players. JetBlue is a Stock Advisor newsletter recommendation. The Fool has a disclosure policy.