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 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 worst ...
Its impressive first-quarter earnings report notwithstanding, shares of Motley Fool Rule Breakers pick Bankrate (Nasdaq: RATE) tumbled this morning, pulled down by the weight of twin analyst downgrades. This morning, both Roth Capital and Needham & Co. appear to have viewed Bankrate's recent rise as a cue to take some winnings off the table. Roth Capital walks away with 12 points of market outperformance from its Jan. 11 bet on Bankrate.

And Needham? ... Well, Needham is trickier. While, according to today's news, the analyst downgraded Bankrate from "buy" to "hold," its last reported rating on Briefing.com, dating from October 2006, had Needham telling us to "hold" Bankrate already. So with that analyst suffering from hinky data, let's focus today on Roth.

Let's go to the tape
Actually, we don't suffer much from the loss of Needham as a guinea pig. The two analysts are pretty interchangeable, reputation-wise. Both rank in the bottom 20% of investors as rated by CAPS; both get three picks wrong for every two they get right. To illustrate how the analysts "earn" these rankings, let's examine Roth's virtual portfolio, which contains a few winners ...

... that are unfortunately more than outmatched by a series of losing bets:

And yet, despite performance that can charitably be described as "mixed," Roth did call Bankrate right back in January. So should we listen to the analyst today, when it criticizes Bankrate for "sacrificing profitability for revenue growth?"

There's certainly merit to the argument. According to yesterday's report, Bankrate nearly doubled its Q1 revenue in comparison to last year, while profits jumped a "mere" 26%. This failure to squeeze more profits from rapidly rising revenue dollars leaves Bankrate valued at a steep 46 times trailing earnings -- which looks pricey even with analysts on average predicting near-30% annual profits growth over the next five years.

Foolish takeaway
But if history repeats and Bankrate can find a way to get those sales down to the bottom line at a quicker pace, Roth and Needham could well be proven too early in "calling the top" on this stock. That said, based on the company's P/E, and absent current cash flow information that might rebut its apparent overvaluation, I have to agree (tentatively) with the analysts today.

It seems best to hold this one until we've got a better picture of its cash profitability.

Do the friendly Fools at Motley Fool Rule Breakers, where Bankrate is a stock pick, agree? Take a free trial and see.