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 best ...
For all that I knock the analyst community for its topsy-turvy ratings ways, every so often you come across an analyst worth listening to. That happened yesterday, when star stock picker Barclays Capital upgraded Ciena (Nasdaq: CIEN) to "overweight."

According to the analyst, Ciena's latest generation of Ethernet and IP equipment looks good enough to steal market share from rivals such as Alcatel-Lucent (NYSE: ALU), Cisco (Nasdaq: CSCO), and Nortel (NYSE: NT). According to Barclays analyst Jeffrey Kavaal, one product in particular, an optical switch called "CoreDirector," more than tripled its annual sales from 2006, bringing Ciena more than $270 million in revenue last year.

All of which sounds good ... and of course, Barclays is one of the best stock pickers on Wall Street (as ranked by CAPS), boasting a string of tech winners in just the few months since it began reporting its recommendations through Briefing.com:

Company	Barclays Said:	CAPS Says:	Barclays' Pick Beating S&P by:
Silicon Labs (Nasdaq: SLAB)	Outperform	***	30 points
MEMC Electronic  (NYSE: WFR)	Outperform	****	16 points
Apple (Nasdaq: AAPL)	Outperform	****	8 points

But hold up a sec. Didn't Ciena report lousy earnings last month? Isn't Barclays playing a bit of a dangerous game, recommending a company that has already disappointed investors mightily?

Yes and yes. But from where I sit, the deck looks stacked in Barclays' favor. 

On the surface, Ciena looks plenty scary. Its 21 P/E and 13% long-term growth estimates give it a 1.6 PEG, folks -- pricey. But looks can be deceiving. From a plain-vanilla GAAP perspective, I'll admit that Ciena seems like no bargain. But dig a little deeper, and I think you'll find that this company is generating a boatload of cash on its cash flow statement, not all of which is currently visible on its income statement.

Ciena may have reported less than $40 million in profits over its last 12 months of operations, but it generated more than twice that sum in free cash flow. With $87.6 million of free cash flow to its name, Ciena's business (once you net out cash and debt) is priced at just more than 7.3 times its free cash flow -- a considerable discount to that 13% growth rate I mentioned above.

Foolish takeaway
The way I look at it, yes, Ciena reported some bad news in December. Yes, the telecom scene is a bit of a mess right now. But Ciena's shares have been hit so hard that they now offer investors a more than adequate margin of safety.

Based on the numbers I'm looking at, I have to agree with Barclay's assessment. 

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