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...
My main problem with Wall Street analysts is their tendency to overcomplicate the simple key to investing: Buy the cheap stuff. Sell the expensive stuff. If you guess right six times out of 10, you're pretty much guaranteed to crush a market that averages 50-50.

That said, every once in a (long) while, an analyst will voice an insight so obvious, yet so brilliant, I'm left dumbfounded that I never saw it myself. Stifel Nicolaus did so last week.

Initiating coverage of Hasbro (NYSE:HAS), LeapFrog (NYSE:LF), Mattel (NYSE:MAT), and JAKKS Pacific (NASDAQ:JAKK), Stifel pointed out two dynamics:

• The number of children aged 10 and under in the U.S. is expected to grow over the next five years.
• At the same time, the number of baby boomers hitting retirement age is likewise growing.

Combine the first point with the fact that the people in the second point include an awful lot of doting grandparents with overflowing retirement accounts, and you've got the makings of a toy boomlet. Brilliant.

Let's go to the tape
Then again, I suppose we should expect the odd flash of brilliance from any investor that, like Stifel, ranks in the top 10% of stock pickers. And with a record of 54% accuracy on its picks, chances are better than even that Stifel will be proven right when it says that Hasbro and LeapFrog are only "holds," but that Mattel and JAKKS are certifiable "buys."

Granted, Stifel only just started looking into the toy industry, so it lacks a track record here. But let's examine its performance on a few similarly kid-friendly stocks:

Hmm. A bit of a mixed record. While Stifel's overall record is encouraging, I'm sad to say that I see no compelling record of outperformance that would lend confidence in Stifel's bullish prognosis on toys. What's more, reviewing the valuations of the four stocks Stifel picked to start off with in this industry, I agree with the new ratings only in part. Here's how I would rank the stocks mentioned, in order from most to least attractive:

Source: Capital IQ, a division of Standard & Poor's, and Reuters. NM = not meaningful.

Foolish takeaway
Of the four, Hasbro seems simultaneously the most expensive (by price-to-earnings) and least expensive (by price-to-free cash flow). Since I personally put more emphasis on a company's free cash flow than on GAAP net earnings, that's the one I'd put my money on, were I a betting man.

JAKKS comes a close second, with both P/E and P/FCF looking mighty attractive. With the company's ties to Disney's (NYSE:DIS) Chronicles of Narnia success -- future editions of which should be rolling out over the five-year time frame that Stifel is targeting -- and Dora the Explorer, this little-known company looks to be a good dark-horse candidate to trump the rest. In short, I agree with Stifel on this one.

As for Stifel's other two picks, I disagree emphatically. Mattel looks too expensive under either valuation metric. To me, it looks much more like a hold than a buy. And LeapFrog? That one's a sell, people. A chronic underperformer, unprofitable under GAAP, and burning cash like a, well, like a frog on a lily-pad-buying spree ... I wouldn't touch that one with a 10-foot tadpole.