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.

Prepare to be disappointed
It hardly seems fair. The market's been in the dumps for so long, and then along comes an analyst who rates EMC (NYSE: EMC) a "buy." Shareholders can be forgiven for thinking: "Hurray! Maybe everybody else is going down, but we, at least, are finally going to have a good day."

And then someone breaks the news to 'em. Sorry guys, it wasn't one of the best analysts. It was Collins Stewart.

Oh.
At which point EMC drops 1.6% -- more than the rest of the market yesterday. Disappointing, sure. But it may have been inevitable, once EMC found its stock linked to an analyst with a 40% accuracy record as tracked in CAPS, ranking behind more than 30,000 rated CAPS players.

Now, don't get me wrong. Collins Stewart isn't all bad; the banker has picked some fabulous winners -- including a couple of Chinese Internet stocks, at least:

Company	CS Said:	CAPS Says:	CS' Pick Beating S&P 500 by:
Shanda Interactive (Nasdaq: SNDA)	Outperform	****	133 points
Sohu.com (Nasdaq: SOHU)	Outperform	****	114 points

Its record on U.S. computer hardware stocks, in contrast, leaves much to be desired:

Company	CS Said:	CAPS Says:	CS' Pick Trailing S&P 500 by:
Intel (Nasdaq: INTC)	Outperform	****	2 points
AMD (NYSE: AMD)	Outperform	**	36 points
Zoran (Nasdaq: ZRAN)	Outperform	***	15 points
ON Semiconductor	Outperform	****	23 points

So when Collins tells us that, "EMC's balanced offering of hardware, software and services should reduce revenue volatility," or that, "Ownership of VMware (NYSE: VMW) gives the company a distinct competitive advantage in virtualized environments," you'll forgive me if I take the analyst's opinion with a grain of salt. I mean, what good does it do EMC to have balance in its hardware, software, and services offerings if the has kicked the legs out from under IT spending across the board?

Plus, EMC's stock is looking a little pricey, don't you think? A 13.6 price-to-earnings ratio, and an 11.8% projected growth rate -- why, that's even slower than the industry average!

Dig a little deeper
I have to admit, between Collins' CAPS record in tech hardware, and EMC's (apparently) unappealing valuation, I went into this column pretty much convinced that I wasn't going to like this buy rating.

Surprise! I do.

Sure, EMC's valuation looks pricey on the surface. But if you dig down into the cash flow statement, I think you'll find that this company is churning out a boatload of cash -- way more than it reports as net earnings under GAAP.  Over the past 12 months, EMC has generated approximately $2.8 billion in free cash flow -- roughly 75% more than its reported net income profits.

Nor is this a recent phenomenon. EMC has consistently generated free cash flow superior to its reported accounting profits in each of the last five years. Its continued cash creation in the face of one of the worst business environments any of us has had the displeasure to live through isn't just commendable. To me, it seems like a great argument in favor of considering an EMC buy.

Not because Collins Stewart says so, but in spite of it.

On Jan. 12, 2009, Fool co-founder David Gardner, Jeff Fischer, and their Motley Fool Pro team will accept new subscribers to their real-money portfolio service. Motley Fool Pro is investing $1 million of the Fool’s own money in long and short positions in a range of securities, including common stocks, put and call options, and exchange-traded funds (ETFs). They also incorporate proprietary CAPS "community intelligence" data into their research. To learn more about Motley Fool Pro, and to receive a private invitation to join, simply enter your email address in the box below.