This Just In: Upgrades and Downgrades

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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 ...
In this column, I often speak of the "best" analysts in a broad, easygoing, let's-just-grade-on-the-curve sense. But not today. Today, we have a bona fide superstar stock picker: KeyBanc Capital Markets.

And here's what this certified "Wall Street Best" banker told us to do yesterday: Sell Bed Bath & Beyond (Nasdaq: BBBY).

Why sell?
KeyBanc cites several factors in arguing that "the Company's operating margin will remain pressured in 2008 and potentially 2009." First, a devalued dollar raises the cost of importing household knickknacks from China. Second, "the retail environment has been weak." (Um, duh.) Third, and finally, bricks-and-mortar retailers like Triple-B have high fixed costs that don't hold up well when pushed by expensive goods and weak sales.

Why listen?
Because KeyBanc is, as I've said, a superstar. Boasting a CAPS rating in the top 5% of investors, KeyBanc gets more than 55% of its stock picks right. (And if you think that's easy, come on over to CAPS and try it some time.) Over the years, it's posted some real winners in the retail space and the plastic purveyors who service it:

Company	KeyBanc Said:	CAPS Says (5 Max):	KeyBanc's Pick Beating S&P by:
MasterCard (NYSE: MA)	Outperform	***	25 points
Jo-Ann Stores  (NYSE: JAS)	Outperform	*	26 points
Pier 1 (NYSE: PIR)	Underperform	*	3 points

And although KeyBanc doesn't always get it right, it's been pretty good so far about limiting the downside when it bets wrong:

Company	KeyBanc Said:	CAPS Says (5 Max):	KeyBanc's Pick Lagging S&P by:
Heartland Payment  Systems  (NYSE: HPY)	Outperform	*****	12 points
Callaway  Golf  (NYSE: ELY)	Outperform	***	10 points
Macy's (NYSE: M)	Outperform	*	6 points

How do they do that?
I'm extrapolating from a single write-up here, but based on what I read of KeyBanc's Triple-B recommendation, this banker outperforms the market by adhering to a simple philosophy. Perhaps you've heard of it: Buy low, sell high. Emphasis on buy low.

While acknowledging the company's multiple strengths -- KeyBanc, for example, points to a healthy balance sheet "with a strong cash balance and no debt" -- the banker nonetheless projects only 9% to 12% earnings growth for Bed Bath & Beyond "over the next three to five years." And even though KeyBanc calls the chain "one of the best operators in the retail sector," it's sticking to its value-investing guns by calling the stock "rich" and expectations "optimistic."

I agree
You might not ordinarily think of a price-to-earnings ratio of 14 as "rich." But weighed against consensus expectations of 12% growth, neither is it cheap. Drop the growth rate to KeyBanc's worst-case scenario of 9%, and the "rich" moniker seems even more reasonable.

Furthermore, consider that based on the past 12 months' free cash flow, Bed Bath & Beyond is now selling for a price-to-free cash flow ratio of 32. To me, that's not just rich -- it's downright Bed Bath & Beyond the pale.