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 ...
By all accounts, this is shaping up to be a horrible year for clothing retailers. Yet Warren Buffett just upped his stake in Walmart Stores (NYSE:WMT), and on Tuesday, Standpoint Research initiated coverage on Aeropostale (NYSE:ARO) with a "buy" rating – saying "The market has over-reacted to bad news."

It gets a Fool to wondering, might there be value in retail after all?

Let's go to the tape
At first glance, Standpoint's record might lead you to doubt it. Although ranked in the top 5% of investors we track on CAPS, Standpoint has relied heavily on the mining sector to power its outperformance – going three-for-three on its recommendations of RTI International, Century Aluminum (NASDAQ:CENX), and Alcoa (NYSE:AA). Meanwhile in retail, Standpoint resembles the slow kid who somehow managed to reach the front row outside a Black Friday sale – soon as the doors opened, Standpoint got trampled:

Yet refusing to be disheartened by its poor past performance, here comes Standpoint once again, standing in the breach and declaring that Aeropostale's a buy. Why?

Well, for one thing, because as bad as the retail news has been, a lot of bad news has already been priced into this stock. Standpoint points out that over the "[t]railing six weeks, Aeropostale is down 28% in a market up 2% ... an under performance of 3000 bps. ... The market has over-reacted to bad news and the shares have collapsed to near 2004 levels adjusted for inflation." Yet over this same time period, Aeropostale's "store count has nearly doubled."

Read that again. The price today is the same as five years ago – but you're getting twice the number of stores for your money when you buy the company today.

Talk about a BOGO offer! Standpoint believes that Aeropostale will gain some 50% over the next 12 to 18 months, and while a potential "double-dip recession" would delay those gains, Standpoint believes they'll still arrive if you can muster up the patience to wait around for "a longer holding period."

Aeropostale: It's worth the wait
And that's the real point of yesterday's upgrade. Standpoint may not be a retail genius, but when a stock's as cheap as Aeropostale is, you don't need to be a genius to spot it.

Now, as far as the timeframe goes, I'm agnostic on the question of how long it will take Wall Street to acknowledge the value in these shares. But that there is value here, I'm certain of. Consider: Aeropostale already sells for just a 10.5 P/E ratio, yet even the pessimistic pack o' analysts who follow it believe the company will grow its earnings in excess of 15% per year over the next half decade. But it gets better.

You see, Aeropostale generated $229 million in free cash flow over the last 12 months – nearly 15% more than it reported as "net income" under GAAP. So as cheap as the stock looks on the surface, it's actually about 15% cheaper underneath. (And don't even get me started about the $285 million in cash and no debt on the balance sheet.)

And even in this awful climate, the company has managed to increase same-store sales, something that many other retailers have been unable to accomplish. In fact, for the last three quarters comps have climbed 10%, 12%, and 11%.

Foolish takeaway
Whether you're a P/E traditionalist, or a lover of free cash flow and strong balance sheets like myself, any way you look at it, Aeropostale is stylin'.