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: Henley & Co.

A star is born
An unfamiliar name (to me, at least) popped up on MSN Money's Friday tally of analyst downgrades, when an outfit by the name of "Henley & Co." initiated coverage on McAfee (NYSE:MFE) by slapping a "buy" rating on the Internet security software firm. "McAfee" -- that's a name we all know. But if you're wondering just who the heck Henley & Co. is, you're not alone.

Fact is, Henley is a bit of an enigma on Motley Fool CAPS, where we require a player to make seven up-or-down calls before assigning it a rank. Before rating McAfee, Henley had only six ratings to its name. Now, it has seven. In honor of its debut into the CAPS rankings, today we're going to try to ...

Get to know this guru
Uniondale, N.Y.-based Henley has been in business for more than 20 years, but according to its website, it still has only one research analyst on staff. The website contains little additional information about the firm, the most notable omission being the origin of its name. The analyst isn't named Henley. Neither is the founder, president, and CEO (one man, three hats). Nor are any of the other three named senior executives. I'm at a loss. Maybe the founder was an Eagles groupie.

Are these guys any good?
But enough about the firm's (limited) biography. What we really want to know about is its resume. When Henley & Co. speaks, should investors listen?

Although we've still got only limited data to work with, my first instinct is to answer: "No." With the required seven picks under its belt, Henley boasts only a 29% record for accuracy, and a sub-20th-percentile CAPS rating. Reviewing its picks, we find two winners and five losers:

Caveat: Henley doesn't appear to be in the habit of announcing when it "drops coverage" on a company. According to its website, Henley dropped coverage of two of these stocks -- Akamai and Interwoven, on June 30, 2007. But on CAPS, unless the firm publicly changes its ratings when dropping coverage, the pre-drop rating proceeds under its own momentum until changed.

Separating the analyst from the analyzed
Of course, even if Henley had a stellar record, I can't say I'd agree with its recommendation of McAfee. Why? First off, I don't trust the company's numbers, and for good reason: This company restates its financials more often than most people change their socks, and files its 10-Qs on time less frequently than most people change their names. Investors who hoped to begin receiving reliable data when the company completed its own name change from "Network Associates" to "McAfee" have been gravely disappointed.

Second, even if we assume McAfee's numbers are reliable, the stock would be too expensive. Recent estimates have McAfee selling for a P/E of 40, but expected to grow its earnings at just over 13% per year. That gives the stock a PEG ratio of 1.77 -- unsustainable in my view. Either the analysts are getting it wrong, and McAfee will somehow grow into its valuation, or the analysts are on target, and the stock price must fall. My money's on the latter.

Fools of a feather sometimes fly together. Fool co-founder David Gardner gave up on McAfee more than a year ago, and recommended that Motley Fool Stock Advisor members sell the stock. To learn what caused David to bail out, take a free trial to the newsletter -- it won't cost you a nickel to try.