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

And speaking of the best ...
Every so often, you see something on Wall Street that makes you go "hmm." Yesterday was one of those days for Yours Fool-y. On the first trading day of the week, out of nowhere, a half-dozen bankers simultaneously initiated coverage on a single company. More surprising still was the unanimity of the coverage: Every man jack of 'em told us to buy SolarWinds (NYSE: SWI).

At first glance, you might think this entirely logical. According to Goldman Sachs (NYSE: GS), SolarWinds sports an "attractive valuation," operates in an "underserved" market, and offers investors a great "growth opportunity." SolarWinds held a superbly successful IPO last month, opening more than a buck over its $12.50 offer price and roughly 25% higher than the IPO price through close of trading yesterday.

But in fact, that very success is our clue to just why each of Goldman, Jefferies, JPMorgan Chase, Ladenburg Thalmann, Morgan Stanley, and Thomas Weisel may now be urging you to buy the stock, because ...

They ran the IPO.

When bankers (don't) attack
According to SolarWinds' prospectus, 12.1 million shares were to be sold at last month's IPO (with more than 25% of them being unloaded by existing owners). The six underwriters named above had an option to purchase 1.8 million additional shares for subsequent resale to the public.

Gee, I wonder if owning nearly two million shares of a company for sale might influence opinions on whether you should buy these shares?

Let's go to the tape
OK, so the analysts are biased. They're conflicted. But are they right? For clues to the answer, let's check out each firm's record on CAPS, in order from best to worst:

• Ladenburg Thalmann: CAPS rating: 84.74; Accuracy: 55.56%.
• JPMorgan: CAPS rating: 83.17; Accuracy: 49.26%.
• Jefferies: CAPS rating: 78.05; Accuracy: 47.77%.
• Thomas Weisel: CAPS rating: "Under 20"; Accuracy: 44.74%.

Oh, and if you're wondering what happened to Goldman and Morgan Stanley ... they don't make all their recommendations public, so we can't track them in CAPS. As for the analysts who we do track, only two of these stock pickers makes it into the ranks of the CAPS All-Stars (those outperforming 80% of all rated CAPS members on the service). The worst (Weisel) under-performs at least 80% of everyone, professional and amateur alike. And the others fall somewhere in between.

So in sum, it seems to me that what we have here is a group of biased analysts recommending that you buy stock that they already own.

Any takers?
I ask that only half in jest. For while the credentials of the analysts shouting "buy" this week don't exactly wow me, I actually do think there's something to be said for SolarWinds. Granted, the company operates in the ultra-competitive market for enterprise software, competing with the likes of IBM (NYSE: IBM), Hewlett-Packard (NYSE: HPQ), and Cisco (Nasdaq: CSCO). But so far, it's doing quite well.

SolarWinds counts big names like Microsoft (Nasdaq: MSFT) among its customers and has formed strategic alliances with Riverbed and Juniper (Nasdaq: JNPR) -- the latter a useful ally in the fight against Cisco. And where so many IPOs of yesteryear offered investors little more than the chance to dump money down the black hole of loss-making businesses, SolarWinds is actually making a profit.

True, the P/E is a bit rich -- 44 as of this writing -- but SolarWinds fans out enough free cash to push its price-to-free cash flow ratio down all the way to 28. If the company can maintain anything like the 64% net income growth it reported last year (unlikely, but at the same time, I can't help but notice that the company grew even faster in 2008 than it did in 2007), this stock just might be as good of a deal as the bankers believe.

In spite of themselves.