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 worst …
Will growth-stock exchange Nasdaq OMX (Nasdaq: NDAQ) outperform the S&P 500? Pull a coin out of your pocket. Flip it. Call it. Was it heads or tails? Buy or sell? Doesn't matter -- either way, you've got as good a chance of being right as Keefe, Bruyette and Woods.

KBW upgraded Nasdaq to "outperform" yesterday. But in truth, this investment banker's record gives me little confidence that it'll be proven right. KBW bills itself as "the largest full-service investment bank that specializes exclusively in the financial services sector." But biggest ain't necessarily best, as KBW demonstrates through its performance on recommendations such as:

Company	KBW Said:	CAPS Says:	KBW's Pick Lagging S&P by:
BB&T (NYSE: BBT)	Underperform	***	20 points
Goldman Sachs (NYSE: GS)	Outperform	**	32 points
Fannie Mae (NYSE: FNM)	Outperform	*	88 points

Which is not to say that everything KBW touches turns to lead. Even plug nickel-flippers manage to get half their picks right, on average:

Company	KBW Said:	CAPS Says:	KBW's Pick Beating S&P by:
Visa (NYSE: V)	Outperform	****	4 points
Bank of America (NYSE: BAC)	Underperform	***	8 points
MasterCard (NYSE: MA)	Outperform	***	9 points

Overall, KBW scores no better than a 50% for accuracy on CAPS. And as the scores above suggest, KBW habitually does so badly on its wrong calls that it now lags nearly 80% of all investors out there -- very few of whom own their own investment banks, I might add.

Still, there's nothing particularly objectionable in KBW's Nasdaq buy thesis. According to the banker, "EPS growth will come primarily from delivering on promised synergies, with upside potential from growth beyond expectations." (Um, duh.) Furthermore: "We see the pullback as an opportunity step into a relatively transparent and resilient earnings story."

Opportunity knocks?
Again, no argument there. Whether KBW is referring to the 14% "pullback" in Nasdaq's stock price since earlier this month, or the 40% tumble from its highs of December, I do not know. Either price cut might easily have drawn the banker's attention. And as for transparency and resilient earnings, why those very things factored into the buy thesis when the Fool's deep value team recommended Nasdaq to members of Motley Fool Inside Value.

Since then, this "relatively resilient" Nasdaq has outperformed the rest of the stock market by a good 14 points. The question now, however, is whether you should buy Nasdaq today.

One word: No
If the record of the analyst recommending Nasdaq doesn't convince you, allow me to elaborate. True, Nasdaq boasts:

• An apparently cheap, single-digit P/E
• A household name
• A reputation as the go-to market for hypergrowth tech companies
• And last but not least, plenty of room for growth abroad

But here's what bugs me: With all these factors working in Nasdaq's favor, this company should be minting cash. It ain't. Trailing free cash flow comes to just under $230 million -- a fraction of what Nasdaq reports as its net earnings under GAAP. Its miniscule P/E notwithstanding, Nasdaq trades for 25 times its cash profts -- which seems a bit rich relative to 20% projected long-term growth.

Throw in the likelihood of muted trading activity and further constriction of cash flows as the nation (and apparently the world) dives nose-first into , and I get a strong feeling you'll get plenty of chances to buy this one cheaper in the weeks and months to come.

Foolish takeaway
Long-term, I see a bright future for Nasdaq. "This kid could go far." That said, there's no rush to buy in today. Wait for a better before you hit the "buy" order on this one.