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 ...
If you're an Interactive Brokers (Nasdaq: IBKR) shareholder, and your head is spinning today, I can certainly understand why. When Keefe Bruyette Woods downgraded your stock yesterday, it did so in the most confounding manner possible.

Arguing that competition in the "high frequency trading" space poses a "challenge" for Interactive Brokers, the analyst downgraded the stock from "market perform" to "underperform." Which is logical, as far as it goes. But here's where it gets weird: At the same time as KBW was downgrading the company, it was talking up the steps IB has taken to mitigate market volatility and prevent a recurrence of last quarter's "outsized losses."

KBW thinks things are going so well at IB, in fact, that it raised its earnings forecast for the company, and not by a fiddlin' penny or two. KBW bumped first-quarter 2010 estimates up by nearly a dime, to $0.24 per share, and predicted the company will earn $0.20 more than previously forecast over the course of this year -- $1.03 per share.

(IB wasn't the only victim of KBW's surreal actions. The analyst also upped estimates on IntercontinentalExchange (NYSE: ICE), while downgrading that stock.)

Let's go to the tape
This next bit is going to really set your head to spinning. As crazy as Keefe's logic appears, the odds seem to favor the banker's being right about Interactive Brokers. Consider the analyst's record:

Throughout the Diversified Financial Services group, and across the nearly three years that we've been tracking its picks, KBW has maintained a record of better than 57% accuracy on stocks similar to Interactive Brokers. And the more helter-skelter the market, the more accurate KBW's been at charting its way. The analyst is currently scoring 62% for accuracy on its active recommendations in this sector.

None of which, I fear, bodes well for Interactive Brokers shareholders today. But why?

IB: Buy the numbers?
On the face of things, Interactive Brokers looks like a straight-up "buy" of a stock. An absolute no-brainer investment. The company sells for less than 19 times trailing earnings, yet consensus estimates tell us that the company will grow these earnings at close to 20% per year over the next five years. And if you use KBW's own estimates for this year's earnings, the picture looks even better. At $1.03 per share in 2010 earnings, the company's stock price suggests it's trading for a seemingly cheaper forward P/E ratio of less than 16.

As if all that weren't enough, from the perspective of price-to-free cash flow, the valuation picture appears better still. With more than $132 million in free cash flow generated over the past 12 months, the stock scores a P/FCF of just 5.1. To me, that looks cheap, cheap, cheap!

Foolish takeaway
So what could be wrong with this picture? Honestly, I'm not sure. Every number I see tells me the stock is a winner; judging from the five-star rating Interactive Brokers commands on Motley Fool CAPS, it seems a lot of Fools agree with me.

And yet I cannot help but notice that when the savvy investors at Motley Fool Stock Advisor first recommended this stock to members, they did so in expectation of much more modest growth than either KBW, or Wall Street in general, is expecting.

Does this mean that our analysts were overly conservative when initially recommending the stock? Or that investors buying shares at these apparently cheap prices are setting themselves up for a fall?

Personally, the odds seem so heavily in investors' favor on this one that I'm willing to take a gamble (albeit, not for at least the next 10 days, per The Motley Fool's ironclad disclosure policy). But if you disagree, I'd love to hear why. Click over to Motley Fool CAPS now, and sound off.