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 ...
As trading wound down on Friday, All-Star stock picker Deutsche Securities closed out its endorsement of Logitech SA (Nasdaq: LOGI). While heaping praise on Logitech for its "innovative products" and uncanny ability to match these products to "secular trends," Deutsche predicts tough times for Logitech this year.

Citing a spike in plastics prices, unfavorable currency-exchange rates, wage inflation in China, and higher shipping costs, Deutsche concludes that Logitech will find its margins squeezed in fiscal 2009 -- which is interesting, because Logitech itself promised the opposite just one month ago. According to management, "FY 2009 gross margin is expected to be above the Company's long-term target range of 32-34 percent."

Who's right?
Who has the best feel for where Logitech's business is heading: The people running the company, or the people running the ratings?

CAPS can't tell us much about Logitech's execs, but it does have a good read on Deutsche Securities. According to our data, Deutsche ranks in the top 15% of investors. However, it does not rank so highly because it is so often right, but rather despite being nearly as often wrong as right. Within the tech sphere, Deutsche has picked some brilliant winners:

Company	Deutsche Said:	CAPS Says (5 Max):	Deutsche Pick Beating S&P by:
Apple (Nasdaq: AAPL)	Outperform	****	93 points
Microsoft (Nasdaq: MSFT)	Outperform	***	12 points
Dell (Nasdaq: DELL)	Outperform	**	10 points

But it's also picked some abysmal losers:

Company	Deutsche Said:	CAPS Says (5 Max):	Deutsche Pick Lagging S&P by:
SiRF Technology  (Nasdaq: SIRF)	Outperform	***	82 points
Micron Technology  (NYSE: MU)	Outperform	***	35 points
Motorola  (NYSE: MOT)	Outperform	**	27 points

But what about Logitech?
Are the Germans right about Logitech this time around? Perhaps, but Deutsche's 50% record for accuracy doesn't give me a lot of confidence.

What I am confident of is the argument I made last month: Logitech is cheap -- and in fact, it has become cheaper since I wrote that column. The company boasts trailing free cash flow of nearly $376 million, for a price-to-FCF ratio of 12.4. Meanwhile, its profits are projected to grow faster than 15% per year over the next five years.

Moreover, I find it difficult to believe that any of the factors Deutsche cites as depressing Logitech's margins will surprise the company. Here at the Fool, we've written about the rising cost of labor in China, the revaluation of the yuan, the price spike in plastics, and the continuing high costs of shipping. If we've noticed all of this, it's a fair bet that Logitech saw it, too, and factored it all into the promise of 34%-plus margins -- a promise, let me emphasize, that Logitech made just one month ago.

On the other hand, if Deutsche is right, and if Logitech did manage to miss all of the trends Deutsche cites, while we Foolish amateurs picked up on each and every one of them ... well, in that unlikely instance, I'd say that margin compression is the least of Logitech's problems.

Foolish takeaway
After weighing all of the evidence, I'm siding with Logitech management and against Deutsche Securities this week. Logitech remains cheap until proved otherwise.