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 ...
In a market as cheap as ours has become, labels such as "best" and "worst" begin to lose their meanings. So long as an analyst has a basic understanding of the concepts of "cheap" and "expensive" and limits himself or herself to recommending only the former, market outperformance over the should be guaranteed.

And with that prelude out of the way, allow me to introduce you to the abysmally rated analyst that we call JMP Securities -- an analyst that has made good guesses, such as these:

Company	JMP Said:	CAPS Says (Out of 5):	JMP's Pick Beating S&P by:
Oracle (Nasdaq: ORCL)	Outperform	****	27 points
Google (Nasdaq: GOOG)	Outperform	***	9 points
Research In Motion (Nasdaq: RIMM)	Outperform	**	8 points

... but also some grand gaffes:

Company	JMP Said:	CAPS Says:	JMP's Pick Lagging S&P by:
Advanced Micro Devices (NYSE: AMD)	Outperform	**	41 points
Riverbed Technology (Nasdaq: RVBD)	Outperform	****	15 points
Micron Technology (NYSE: MU)	Underperform	**	9 points

This morning, JMP upgraded Cisco Systems (Nasdaq: CSCO) to buy. Even though JMP has a worse record than some 80% of its peer investors on CAPS, and even though it has guessed wrong on 55% of its stock picks ... this time, JMP is getting it right.

Citing Cisco's history of gaining market share in market downturns and marveling at the company's "fortress balance sheet ... dominant market position and strong execution skills," JMP argues that the current global recession is just another opportunity for the tech giant to succeed.

Now, you can quibble with this optimistic take all you like. But JMP's real argument -- the one that wins me over -- is one you can't argue with: "Throwing out all forward valuation methods as unreliable given the potential for wild swings in earnings or sales assumptions, we are focusing only on trailing valuation metrics." JMP then proceeds to cite Cisco's "free cash yield of 10.5%," a valuation that JMP calls "silly," as the key reason to own this stock today.

I agree
You're probably familiar with the concept of "free cash yield" -- but you may know it by another name: the price-to-free cash flow ratio. ("Yield" is the inverse of this ratio.) With $10.8 billion in free cash flow generated over the past year, Cisco sells for roughly 10 times trailing free cash flow -- and that would only add to the nearly $20 billion in cash on Cisco's balance sheet.

Foolish takeaway
Fools, if Cisco achieves even half of the 15% annual growth rate that most analysts project for it, that price is cheap. And if the projections prove close to accurate? Then it's dirt cheap.

In the coming weeks, Fool co-founder David Gardner and his Motley Fool Pro team will invest $1 million in a portfolio designed to help you make money in any market. The service, which just launched, will rely heavily on proprietary CAPS “community intelligence” data to establish long and short positions in a broad range of securities, including common stocks, publicly traded put and call options, and exchange-traded funds. To learn more about Motley Fool Pro and to receive a private invitation to join, simply enter your email address in the box below.