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 ...
Shares of software titan Oracle (Nasdaq: ORCL) are leading the market up once again. And whom should we thank for the good fortune?

Caris & Company. The All-Star-rated investment banker initiated coverage on Oracle this morning with an "above average" rating, explaining that it sees multiple benefits from the firm's plan to purchase Sun Microsystems (Nasdaq: JAVA):

• First and foremost, Caris makes the obvious argument that acquiring Sun gives Oracle a greater share of the IT market. Natch.
• Which leads logically to the second point -- bringing Sun in-house reduces competition in the IT space by exactly one player.
• Third, Caris furthermore argues that Oracle's larger size will help it to compete against Microsoft (Nasdaq: MSFT).
• And finally -- and getting back to the obvious again -- a bigger Oracle will necessarily reap a bigger share of the benefits from any revival in the global economy.

In essence, therefore, Caris is making a "bigger is better" argument for Oracle. But is it right?

Let's go to the tape
Survey says: Yes. Nearly three years of tracking Caris's performance here at CAPS reveals that this analyst is in fact more often right than wrong on its picks (albeit just barely). That's good enough to place Caris ahead of more than 80% of the investors we track.

More telling still is the analyst's record in the software and "Computers and Peripherals" sectors of the economy. Caris has been on a roll here of late, with its active picks in the software sector beating the market 67% of the time, while its picks in Comps-and-Peris outperform a stunning three times out of four:

Stock	Caris Says:	CAPS Says:	Caris's Picks Beating (Lagging) S&P By:
Apple (Nasdaq: AAPL)	Outperform	***	100 points
EMC (NYSE: EMC)	Outperform	*****	48 points
Hewlett-Packard (NYSE: HPQ)	Outperform	***	34 points
Sandisk (Nasdaq: SNDK)	Underperform	****	(56 points)

Caris places a lot of weight on Oracle's soon-to-be-released "Fusion Apps" software, which is designed to allow on-demand access to Oracle data centers over the Internet. Caris calls the impending release a "catalyst" that could unlock value in the shares. But me -- I've got a more basic reason to love the stock.

Oracle's cheap
Oh, I know that Oracle's P/E of 20 doesn't exactly scream "value" to most investors. It's at best a decent price, and so no bargain. But consider that over the past five years, including the extremely rough 2008, Oracle managed to grow its profit in excess of 23% per year on average.

True, analysts expect to see something short of 14% growth going forward, which makes the 20 P/E look pricey indeed. But consider that Oracle is actually much more profitable than it lets on. GAAP filings show the company earning just under $5.6 billion over the last 12 months, but it generated $7.7 billion in free cash flow. Viewed from that perspective, the enterprise trades at less than 14 times free cash -- and is valued right in line with growth estimates.

Foolish takeaway
The way I see it, Caris has multiple chances to be proven right on today's pick:

• If a bigger Oracle enables the company to outpace analyst estimates, and maintain anything like its growth rate of yesteryear, then interest in the stock would certainly surge.
• If its acquisition of Sun enables Oracle to transform that money-burner, and generate anything like Oracle's own 24% profit margin from Sun's $12.6 billion annual revenue stream, the stock could explode.
• If Fusion proves a success, the stock could catch fire.

And if all three theories "work"? Fools, Oracle could go nuclear.