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 worst...
Two of Wall Street's best and brightest ended the trading week with identical conclusions about Ciena (Nasdaq: CIEN) Friday.

Lehman Bros., which had toed a bullish line on the telecom equipment maker since early July 2007, finally admitted defeat after last week's earnings news. Downgrading the stock from "overweight" to "equal-weight," Lehman netted itself a 47-point loss on CAPS. Ciena now takes its place as the 16th-worst call Lehman has made in the two years we've tracked it on CAPS (see Lehman's "ratings graveyard" here.)

Telling investors to buy Ciena last summer turned out to be:

• Worse advice than when Lehman recommended buying Motorola (NYSE: MOT) in November 2006.
• Worse, too, than its buy rec on WaMu (NYSE: WM) of last October.
• But not quite as damaging as Lehman's suggestion to buy Rite-Aid (NYSE: RAD) in December 2006.

... and the best ...
In contrast, laughing all the way to the bank was international megabanker Credit Suisse. It took only a few weeks for this banker's skepticism over Ciena to be proved prescient, and on Friday, CS took a victory lap -- taking Ciena up a notch from "underperform" to "neutral" in the process. Ciena has earned a place in the banker's "Top 20" picks now closed.

"Shorting" Ciena on Credit Suisse's say-so in July 2008 may not have earned investors as much money as some of CS's 2007 predictions -- to sell Western Refining (NYSE: WNR), for example, and to buy CNOOC (NYSE: CEO) and Agrium (NYSE: AGU). But over the two years we've monitored CS's ratings, never before has the banker made so much money for investors in so little time -- 36 points worth of market outperformance in just 51 days.

Where we stand
After Friday's ratings moves, of course, both of these analysts finally agree about Ciena: It's a "hold." And yet, both Lehman's and Credit Suisse's ratings last week share a single deficiency: No one seems to know exactly why the analysts changed their minds. Oh sure, we can guess: Obviously, Lehman wasn't thrilled with Ciena's projection of an earnings decline in Q4. And probably, Credit Suisse thinks this prospective disappointment is now baked into the stock price. But no major news outlets have yet come out with a story explaining the details of either banker's thinking.

Materiel concerns
I'm thinking: Perhaps you'd like just a little more information on which to base a decision to keep "holding" this stock, than just a couple analysts' say-so? Or maybe an idea of what to look for before deciding that it's time to switch from "hold" to "buy" or "sell?"

If that's the case, then here are a few numbers you can watch. Reviewing Ciena's 10-Q filing and comparing it with what Ciena reported one year ago, I noticed two trends of interest. On the plus side, Ciena's doing an admirable job of keeping its inventory moving. Total sales in fiscal Q3 were up 24%, yet management somehow kept its inventory levels almost flat year over year. That's just plain superb management of working capital right there.

On the minus side, however, I noticed that one item of inventory in particular dropped dramatically this quarter: Raw materials. With sales up 24%, Ciena now has 36% fewer parts on hand to build new equipment. (Finished goods, in contrast, are up a modest 17%.) To me, this suggests that Ciena is preparing for the significant slowdown in sales it forecast last week. It not only says it thinks the slowdown is coming -- it's acting on that belief.

Foolish takeaway
As for your humble Foolish writer, you know my opinion: Ciena is cheap. Cheap enough to offer a margin of safety if you buy now in anticipation of a recovery in Ciena's business later.

That said, the recovery may be some time in coming. If you're considering buying Ciena now in hopes that management lowballed investors last week -- that Ciena will deliver an "upside surprise" next quarter -- well, let me just say that from the numbers I'm looking at, if an upside appears in the near term, it will surprise Ciena as much as the rest of us.