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.

In "Get to Know a Guru," we go another route. Here, 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: Pacific Growth Equities.

Profiles in punditry
An unfamiliar name (to me, at least) popped up on MSN Money's tally of analyst downgrades last week. "Pacific Growth" initiated coverage on data-storage-meister EMC (NYSE:EMC) with a buy rating. And if you're wondering just who Pacific Growth is, and just how good it is at picking tech stocks, you're not alone. Fortunately, that's the kind of question I aim to address in this column. So without further ado, let's ...

Get to know this guru
Here's what CAPS has to say about the firm: "Pacific Growth Equities is a research driven investment bank offering a full range of financial services with a specialization in technology-based emerging growth companies. The Research Team at Pacific Growth lies at the core of their business and often impacts decision-making in many other divisions. Analysts always have the final say on research coverage."

Digging a little deeper, I discovered that while it's based in San Francisco, Pacific Growth also maintains an office in Boston. What business does Pacific Growth have keeping a shingle hanging on the Atlantic coast, you ask? Perhaps it's because Pacific Growth focuses not just on health care and consumer goods, but also on the life sciences and technology sectors for which Boston is famous. "Private, independent and wholly employee owned" since its establishment in 1991, Pacific Growth boasts a team of nine equity analysts, each "empowered to make the tough calls."

Are these guys any good?
So much for the firm's biography. What we really want to know about is its resume. When Pacific Growth speaks, should investors listen?

Listen, yes. Follow advice blindly, no. Reviewing the firm's record on CAPS, we find that Pacific Growth gets the majority of its calls right, but it's having a tough time with its tough calls. In spite of an accuracy record bordering 50%, Pacific Growth sits in the bottom half of investors with a CAPS rating of just 45.58. For while it often guesses right, it has a tendency to lose investors a lot of money when it guesses wrong. As, for example, when it recommended:

Meanwhile, Pacific Growth's correct picks have been more numerous, but less lucrative:

Separating the analyst from the analyzed
Statistically speaking, the odds seem to favor Pacific Growth being right in endorsing EMC last week. But for my part, I remain unconvinced.

And not just because of Pacific Growth's mixed record, either. Rather, it's EMC's valuation that gives me the willies. Trading for 31 times trailing earnings is bad enough, but analysts on average only expect the firm to grow those earnings at 15% per year over the next five years. Flip over to the cash flow statement, and things look a bit more reasonable for EMC, which trades for 22 times trailing free cash flow -- a more reasonable number relative to profits growth, but still far from cheap.

Were I the "rating" type, I'd be more likely to give EMC a "hold" than a "sell." I say this based on the quality of the shop, its renewed investments in R&D, its proven ability to make smart acquisitions such as that of VMware, and the rapid growth in free cash flow EMC exhibited last quarter. That said, the price is far from cheap, and for a value investor like me, it simply doesn't justify a buy rating.

Disagree? Feel free -- just tell us why on CAPS. (There's no fee.)