This Just In: Upgrades and Downgrades

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Editor's note: Because of an error in our source data, an earlier version of this story indicated that GARP Research had also upgraded Broadcom. That was not the case, and the article has been modified to reflect that. The Fool regrets any confusion that may have arisen.

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 worst ...
One of Wall Street's less-famed names chimed in with its opinion on Broadcom (Nasdaq: BRCM) yesterday. Global Crown Capital panned the stock, downgrading it to "underweight" and predicting a $19-a-stub price within a year.

Why did Global Crown pan Broadcom? Your guess is as good as mine. Presumably, the rating has something to do with Broadcom's buying Advanced Micro Devices' (NYSE: AMD) digital TV business last month. But the simple fact of the matter is that we don't know for sure what tipped Global Crown to make its call.

Let's go to the tape
As an individual investor myself, I know how frustrating this can be -- seeing a "buy" or "sell" rating slapped on your stock, with no one bothering to tell you why. But when something like this happens, there is at least one place an investor can turn for guidance and perspective: Motley Fool CAPS.

We may not always know exactly what the analyst is thinking. But thanks to CAPS, we can at least tell you how well it thinks. For example...

Golden Crown
... takes a cautious approach. This yields somewhat-fair accuracy on its picks (47%), but not-so-fair performance overall. This Frisco-based asset manager ranks in the bottom half of investors tracked by CAPS. A sampling of its picks to-date includes a couple of big winners (including AMD, the recent beneficiary of Broadcom's largesse):

Company	Global Crown Said:	CAPS Says:	Global Crown's Pick Beating (Lagging) S&P by:
AMD	Outperform	**	42 points
Palm (Nasdaq: PALM)	Outperform	*	22 points
Electronic Arts (Nasdaq: ERTS)	Outperform	***	(10 points)

So, should we?
Much as I'd prefer to be telling you this analyst is superior, and clearly one whose advice you should follow -- I can't. Honestly, today's player doesn't impress me mightily, so I think you're best advised not to follow Global Crown's lead. Why? It's a simply matter of valuation.

At first glance, Broadcom and its 40 P/E look awfully expensive. But if you dig a little deeper, I think you'll find that the GAAP statistics are hiding a real value here. Thanks to its prodigious cash generation, Broadcom sells for less than 15 times free cash flow, which compares favorably to analyst predictions of nearly 16% long-term growth for the company.

Foolish takeaway
Also consider the fact that Broadcom carries a sizeable cash cushion. Even after paying off AMD, Broadcom's wallet should look right plump at $1.7 billion. To my Foolish mind, that creates an enterprise value-to-free cash flow ratio of less than 13 times, and a sizeable for new buyers.

For me, that doesn't add up to a "sell" rating.