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 ...
Motley Fool Stock Advisor recommendation Netflix (NASDAQ:NFLX) got a much-appreciated boost yesterday on an upgrade from "neutral" to "buy," courtesy of investment banker Piper Jaffray. Most investors, quickly bidding up the shares 3% on a down day for the markets, seemed cheered by the upgrade.

But I have a somewhat different reaction. I want to know what Piper has been smoking.

Let's go to the tape
You see, Piper doesn't have a particularly enviable record as a stock picker. While a bit smarter than the average bear, the banker's 68.34 CAPS rating hardly gives it bragging rights. And with a record for accuracy of less than 41%, this analyst makes three wrong guesses for every two right. For example:

Were it not for on-the-mark picks like Baidu and Google, I shudder to think what this analyst's scorecard might look like.

Brass tacks
As if its overall record weren't bad enough, things go downhill for Piper the closer you get to Netflix. According to both CAPS and our data provider, Briefing.com, Piper hasn't made public its opinion of Netflix rival Blockbuster (NYSE:BBI), but the last time it rated hopeful-rival Amazon.com an underperformer, it racked up 20 points' worth of market underperformance.

And the most telling statistic of all? When last Piper went bullish on Netflix, in October 2006, the stock proceeded to lag the market by 30 points before Piper tapped out in May. Why investors would want to hitch themselves to a wagon driven by this contrarian indicator of an analyst is beyond me.

I mean, it's not even as if Netflix were cheap. With a trailing price-to-earnings ratio of 25 and profits growth projected at 18% per year over the next five years, the stock looks fairly priced at best. Look a little closer -- at, say, the 10-Q filing showing that Netflix conservatively generated a whopping $6 million in cash profits (cash from operations minus capital expenditures and money spent buying DVDs for its content library) so far this year -- and the stock appears wildly overvalued. Annualize that, and Netflix seems headed for a price-to-free cash flow ratio as high as 195. Sure, in theory, it could grow into even that lofty valuation. But if fellow Fool (and Netflix shareholder) Rick Munarriz is right, there may be no more market to grow into.

Foolish takeaway
Now add to this mix a CEO who last week exercised 2,500 stock options, and then promptly sold 10,000 shares of stock. And don't forget about the insiders who in general have dumped 9.2% of their shares over the past six months. I hardly think a single upgrade from a mediocre analyst justifies yesterday's rise in price.

Disagree? Feel free. Heck, you're even in good company, because the folks over at Motley Fool Stock Advisor have rated Netflix a "Best Buy Now." To learn why they think I'm the one on the pipe, take us up on our free trial offer.