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 worst ...
As trading wound down for the week and investors prepared to close their laptops and head out to the beach, one analyst shouted: "Wait up!" and rushed to leap aboard the Yahoo! (Nasdaq: YHOO) bandwagon before it left town.

Last month, we discussed twin upgrades published on this stock by two well-known names: Barclays Capital and Citigroup. Our latest contestant, though, is a somewhat less-than-star-quality player on the Street -- Thomas Weisel. (You may recall its ill-timed downgrade of EMC (NYSE: EMC) earlier this year).).

But before following its advice on Yahoo!, you might want to consider the bigger picture.

Let's go to the tape
True, Weisel has made successful endorsements of computing giants Hewlett-Packard (NYSE: HPQ) and Cray, in addition to its call on Apple in spring 2008. But it's within Yahoo!'s own virtual world of "Internet stocks" that Weisel's prowess falters:

Stock	Weisel Says:	CAPS says:	Weisel's Picks (Beating) Lagging S&P By:
Rackspace Hosting	Outperform	***	2 points
Symantec (Nasdaq: SYMC)	Outperform	**	(15 points)
Netflix (Nasdaq: NFLX)	Outperform	***	(13 points)

Uh oh
I know. I've written before about how badly things turn out when analysts start running in herds. So far, both of the analysts who preceded Weisel in endorsing Yahoo! are licking wounds right now (albeit "just flesh wounds" -- Barclays only losing to the market by three points on Yahoo!, and Citi by five.)

So maybe Weisel is feeling proud for waiting until now to board the Yahoo! train, sidestepping its peers' losses and magnifying its own chance of outperforming the market by calling a lower "bottom" on the stock.

And maybe not
Maybe, but I don't think so. Here's why: According to Weisel, Yahoo! CEO Carol Bartz has been busy cutting costs at her new corporate home. Weisel thinks these cuts will improve profitability at the company despite the fact that revenue continues to slide amid a tumbling advertising market.

But to my Foolish eye, the stock's still not a buy. Yahoo! may be cheaper today than when I last wrote about it, but trailing free cash flow of $750 million still leaves this stock with an enterprise value of more than 23 times its free cash -- too rich a valuation, even for the 16.5% five-year growth that Wall Street expects Yahoo! to produce.

Foolish takeaway
Considering that you can own proven performers such as Google (NYSE: GOOG) or Microsoft (Nasdaq: MSFT) at cheaper valuations (an enterprise value / free cash flow of 17 for the Google giant, or 11 for Mr. Softie), I just don't see the logic in buying a worst-of-breed player like Yahoo!

So don't do it, Fool. Wall Street's all wrong on this one.