This Just In: Upgrades and Downgrades

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycles 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 did.

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 ...
As most market indexes are struggling to keep their heads above water this morning, the biggest name in chocolate is bleeding red, the victim of a vicious bear-mauling -- or less poetically, the victim of a downgrade to "underperform" from investment banker Bear Stearns.

On Wednesday, Bear argued that a boardroom coup at Hershey (NYSE:HSY) would end with incoming CEO David West being forced to take a number of steps injurious to the chocolatier's short-term profits. Predicting that Hershey will initiate "higher research and development and marketing spending," and that rising raw materials costs will continue to squeeze margins, Bear expects the firm to earn no more than $2.06 per share next year.

For the record, that estimate is just $0.2 shy of being the lowest on Wall Street. (Meaning, yes, someone's more bearish than Bear.) But is Bear right or wrong on this one? To learn whether this ursine is Major or Minor at stock picking, we turn once again to Motley Fool CAPS for a glimpse at its record.

Let's go to the tape
What we find there is an analyst ranked in the top 10% of CAPS players, boasting a CAPS rating above 90 (alongside a less-impressive record of 53% accuracy). How does Bear turn accuracy levels near those of a flipped coin into market-thumping results? By making sure that at least a few of its picks pay off well. Picks like these:

Granted, even the best of us make mistakes, and Bear has its share:

Foolish takeaway
If we check back one year from now, in which of the above tables will we find Bear's Hershey pick? Personally, I suspect this one will go in the winners column. Mind you, I make no claim to being able to read a boardroom as well as Bear. But I can read a simple valuation model.

At 30 times trailing earnings, Hershey seems wildly overpriced to me, considering that the consensus of analysts -- most of whom, remember, are more optimistic about profits than is Bear -- is that Hershey will grow its profits no faster than 10% per year over the next half decade.

Granted, things look a little better from a cash profits perspective. The firm's $630 million in trailing free cash flow is double the firm's reported net earnings for the past year, giving us a price-to-free cash flow ratio of less than 15. But this valuation, though less absurd, still falls short of "cheap." I might not follow Bear's advice and sell Hershey at today's price, but I definitely will not be a buyer.