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 track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

And speaking of the best ...
What do you do when one of the best bankers in the business upgrades the shares of one of the most trouble-prone Internet shops in the world? Personally, I listen up. Because if there's one stock that's consistently disappointed investors over the past few years, it's Yahoo! (NASDAQ:YHOO). But if there's one banker who's done nothing but reward the investors who followed its advice, it's Barclays Capital.

This morning, Barclays started off the trading week with a bold prediction. Calling Yahoo!: "better structured, [with] a renewed sense of innovation, and ... well positioned to benefit from an eventual rebound in advertising," Barclays sees the firm not just surviving the current economic downturn, but thriving and gaining some 26% in market cap over the next 12 months.

Let's go to the tape
Crazy talk, you say? Google (NASDAQ:GOOG) will crush Yahoo, and all hopes of Microsoft (NASDAQ:MSFT) riding to the rescue with a buyout are faint? Perhaps. But before you dismiss Barclays' arguments, take a moment to consider this banker's record of success in the technosphere:

59% of the times Barclays says a stock will beat (or lose to) the market, it does just that, and even more impressively, Barclays' picks have historically outperformed the S&P 500 by better than eight points apiece. Put it all together, and Barclays consistently ranks among "Wall Street's Best" stockpickers as scored by CAPS.

And yet ...
You'll have to look long and hard along Wall Street to find a professional research shop with a record better than Barclays'. And yet, I have to admit that at first glance, there doesn't seem to be much sense to endorsing Yahoo! at this price.

I mean, the stock sells for a 1500 P/E, for Pete's sake! Analysts as a group expect to see profits rebound next year, sure, but only enough to bring the P/E down from stratospheric to upper-atmospheric levels -- 39 times earnings. Weighed against consensus growth expectations of just 16.5% over the long term, there doesn't seem to be a lot of reason to own Yahoo! here, Barclays' endorsement notwithstanding.

Or is there?
Making one final stab at finding a method to Barclays' apparent madness, I dug into Yahoo!'s cash flow statement to see if perhaps cash profits are so wildly out of proportion to reported earnings under GAAP, as to explain the disconnect.

Nothing doing. While it's true that Yahoo! has plenty of cash (about $3.4 billion) squirreled away already, and is generating more green even as we speak (free cash flow totaled $750 million over the past 12 months), these figures still have the company trading for 25 times enterprise value -- more than a little pricey given the growth prospects.

Foolish takeaway
Much as I respect Barclays' stock-picking acumen, I have to conclude that today it made the wrong call. With its rock-solid balance sheet and strong cash-generating potential, Yahoo! may not be going away any time soon -- but it's not going anywhere either.