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 best…
Shares of dry bulk hauler DryShips (Nasdaq: DRYS) levitated clear out of the water this morning on an upgrade from ... well ... not exactly the best analyst in the world, but not quite the worst, either. Oppenheimer chose this morning to call a halt on the slide of foundering DryShips, upgrading the stock to "perform" on the belief that:

• Pressure from the firm's $500 million equity offering is abating, as DryShips is probably about halfway through its massive share dilution effort.
• The cash brought in by the follow-on offering, although dilutive to existing shareholders, should help keep DryShips compliant on its loans -- reducing the risk of falling into default.
• "Day rates have improved dramatically since November," partly in response to higher Chinese iron ore imports.
• And as a result, dry bulk shipping rates are now "above cash-breakeven costs."

So what?
If you're wondering whether Oppenheimer's new opinion on DryShips is worth the virtual ink it's printed with, I cannot blame you. After all, according to our records on CAPS, the analyst isn't quite as accurate as a coin flip. Oppenheimer gets fewer than 50% of its picks right, and its overall performance just barely outperforms the returns you could get from a plain vanilla S&P 500 index fund.

But here's the thing: On (rare) occasion, Oppenheimer makes some truly brilliant calls, and lately, it's been making a whole lot more good picks than bad. In recent months, for example:

	Oppenheimer Says:	CAPS Says:	Oppenheimer's Pick Beating S&P by:
Arena Pharma (Nasdaq: ARNA)	Outperform	***	41 points
Vimpelcom  (NYSE: VIP)	Underperform	****	24 points
Honeywell (NYSE: HON)	Outperform	*****	22 points

It hasn't been all champagne and caviar for the analyst, of course. Oppenheimer has stumbled a few times over the past three months:

	Oppenheimer Says:	CAPS Says:	Oppenheimer's Pick Lagging S&P by:
Savient Pharma  (Nasdaq: SVNT)	Underperform	**	32 points
Digital River (Nasdaq: DRIV)	Underperform	**	12 points
Devon Energy  (NYSE: DVN)	Outperform	*****	17 points

But overall, it's hard to conclude anything other than that this analyst is on a winning streak. More important still, this streak includes a (as-of-this-morning-defunct) rating on DryShips itself. Late last month, Oppenheimer correctly predicted that DryShips would run aground, and it has -- underperforming the market by a whopping 41 percentage points over the past three weeks.

So yes, when Oppenheimer tells us that DryShips has sunk as far as it's going to, I think this deserves a listen.

And a look
Of course, being a Fool, I don't just take Oppenheimer at its word on this. I also did a little digging into what's up at DryShips. And truth be told -- I kinda like what I see.

Historically, my biggest concern about DryShips was the fact that despite reporting massive profits (the company's P/E now stands at 0.2, if you can believe that), the firm generated negative free cash flow. But that may soon change.

According to a recent SEC filing, management is battening down its balance sheet to ride out the current economic storm. After four straight years of spending more than it earned (in cash) on buying new ships, CEO George Economou now promises to spend no more than $150 million in additional capital expenditures this year. Selling "three Capesize newbuildings," plus "the cancellation of the acquisition of nine Capesize vessels" will reduce the firm's anticipated cash outlays by a massive $1.5 billion. In which case, DryShips should finally begin reaping the benefits of the cash generated from its operations ($770 million over the past 12 reported months.)

We won't know how that works out, valuation-wise, till DryShips finishes up its equity issuance and gives us a tally of the new share count. But I think it's likely that the enterprise value-to-free cash flow ratio on the firm will settle into the single digits when all's said and done.

Foolish takeaway
Fools, that looks cheap. But be warned: I still wouldn't actually go out and buy the stock -- even at this low price. Fellow Fool Stephen Ellis' concerns about management's cavalier attitude toward outside shareholders, exemplified by the recent share dilution, still ring true for me. Plus, Economou's decision to issue more stock today, rather than, say, back when the shares were fetching $100 apiece, tells me the CEO isn't exactly the brightest lantern at sea.