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 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 ...
International megabanker Citigroup picked up a mouse and clicked the "buy" button on Logitech (Nasdaq: LOGI  ) yesterday. While acknowledging that the U.S. is currently in the throes of a "consumer-led recession," Citi took the long view on Wednesday, peering into the future and calling the Swiss computer peripherals maker "a play on the 'digital home.'"

The idea is that, over time, consumers will bring more and more high-tech gadgets into their homes. Citigroup believes that Logitech, which aims to make all these electronic widgets play nicely with each other, sits at the epicenter of a trend. (Speaking of trends, this picture on Amazon.com shows one of Logitech's recent hit products -- the universal remote control.)

Let's go to the tape
But just how good is Citi at trendspotting? For a clues to the answer, we turn to the firm's record on CAPS. The company ranks just shy of the top 10% of investors -- in large part thanks to PC-industry picks like these:

Company

Citi Said:

CAPS Says
(5 max):

Citi's Pick Beating
S&P by:

Activision (Nasdaq: ATVI  )

Outperform

*****

34 points

Hewlett-Packard
(NYSE: HPQ  )

Outperform

****

31 points

Research In Motion
(Nasdaq: RIMM  )

Outperform

**

15 points

And yet, if you look closely, you'll see that Citi achieves its high rank in CAPS not because it's so often right, but despite a number of wrong predictions. Seems if you have enough ideas as good as the ones above, your reputation can survive a few boneheaded plays like:

Company

Citi Said:

CAPS Says
(5 max):

Citi's Pick Lagging
S&P by:

Netflix (Nasdaq: NFLX  )

Underperform

***

69 points

XM Satellite (Nasdaq: XMSR  )

Outperform

*

21 points

Symantec (Nasdaq: SYMC  )

Outperform

**

16 points

Short Netflix? Invest in money-burning XM? Are you kidding me? I have to say, these picks didn't do any favors for Citi's rep as an analyst able to chart the path of tech convergence. (That said, I happen to agree with Citi on its Symantec call, so perhaps Fools in glass houses should put down those stones.)

Foolish takeaway
Another call I agree on? Logitech. The many reasons Citi cited in endorsing the stock yesterday included Logitech's "strong competitive position, structural growth profile ... [and] strong free cash flow generation." At the risk of being subjective, sitting here in front of my computer, clicking a Logitech mouse and pecking away on a Logitech keyboard, the company's competitive position looks pretty darn strong to me.

As for the other two elements Citi mentioned, most analysts agree that Logitech can grow its profits at about 16% per year over the next half-decade. When I match this estimate against the company's price-to-free cash flow ratio of less than 15, the stock looks mighty attractive. And when I notice that Logitech has roughly half a billion dollars on its balance sheet, against no long-term debt, the valuation looks more attractive still.

Long story short, this one's a long-term winner.


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