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 tell you only what the analysts said. We show you whether they know what they're talking about. To find that out, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

And speaking of the worst ...
Does your financial advisor make sense? If you've chosen to listen to Susquehanna Financial, that question might have crossed your mind. I had to ask it this morning, when Susquehanna downgraded shares of Indian high-tech powerhouse Infosys (NASDAQ:INFY) on grounds that are highly suspect.

Let's go to the tape
Before I get to the meat of the downgrade, let's take a moment to examine this analyst's record and find out whom we're dealing with.

According to CAPS, this portfolio player ranks in the bottom 20% of investors. After reviewing 180 recommendations made public over most of the past two years, we can confirm that this analyst is wrong more often than it's right, with its average pick underperforming the S&P 500 by more than 1%. For example:

So Susquehanna hasn't been doing well with some of its investment ideas in Infosys' geographical backyard. But let's give credit where credit's due: As badly as Susquehanna has fared with some of its Chinese picks, it's done really well with picks in Infosys' economic backyard -- the software industry:

Getting back to Infosys
Now that we have a bit of an idea about Susquehanna and what it's good at, let's look at today's panning of Infosys. Susquehanna downgraded Infosys to neutral primarily on valuation concerns.

Noting that the stock had already rallied nearly 50% off of its March lows, and is now trading at a PEG of about 1.4, based on the next 12 months of earnings, Susquehanna concluded that Infosys was too expensive compared to peers like Satyam (NYSE:SAY) and Cognizant  (NASDAQ:CTSH), and suggested that investors consider buying those shares instead (Disclosure: Motley Fool Stock Advisor has also recommended Satyam).

Now, setting aside debates about how much to rely on PEG ratios (my own view is that they're a useful tool for developing a probably expensive/possibly cheap overview), I still have two concerns over Susquehanna's analysis:

• As I explained in "Dangerous Growth" some time ago, I don't like PEG ratios based on earnings that haven't happened yet. This piles on the guesswork for any valuation by weighing a guess at future earnings against another guess at future growth. To my mind, PEG ratios should be based on earnings that have already been booked -- the trailing P/E.
• Under this metric, Infosys carries a 21.5 P/E, which, when divided by 23.7% predicted growth, yields a 0.91 PEG. To me, that means Infosys is cheap. It's also, by the way, cheaper than the two stocks Susquehanna recommends cycling into -- Cognizant carries a 1.0 PEG, Satyam a 1.1.

Foolish takeaway
Each of these three stocks is fairly to attractively priced. Each one is worth owning at today's valuation. Accordingly, Susquehanna's downgrade is baseless, and the resulting 4% sell-off in Infosys shares this morning was unjustified.