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.

Is two the charm for Oracle?
Are you an Oracle (Nasdaq: ORCL) investor? Are you grinning from ear to ear? Congratulations, you should be.

Christmas came early to Oracle shareholders as not one, but two of Wall Street's finest tagged the stock a "buy" yesterday. Ace stock picker Janney Capital led off the gabfest, praising Oracle for earning "one of the highest operating margins in the industry," and for demonstrating a remarkable ability to "protect and even expand its margin" even as it buys up -- and improves -- lesser businesses. And no sooner had it mentioned this than an even better stock picker jumped onboard. Said Soleil Securities: "We believe that Oracle has positioned itself extremely well strategically with a string of software acquisitions followed now by the Sun acquisition."

But is that enough reason to own Oracle?

Let's go to the tape
Possibly. After all, if you're going to let an analyst tell you whether to buy or sell a stock, you could do far, far worse than making Janney and Soleil your oracles. These two firms rank among the very best advisors in the business, consistently scoring in the top 10% of investors we track on CAPS.

Problem is, there's just one area of the market where both fall down: Software.

Open mouth. Insert foot. Insert other foot.
Don't get me wrong. I generally admire the records of both these bankers. Janney pulled a real rabbit out of the hat when it discovered Green Mountain Coffee Roasters a few years ago and turned it into a four-bagger for its clients. Soleil did quite nicely with its Amazon.com recommendation that same year, and twice as well with Apple the year before. But while they're superb stock pickers in other respects, both these analysts fall flat when trying to divine the future of America's software industry.

For its part, en route to a 48% record for accuracy, Soleil has stumbled over stocks such as:

Meanwhile, Janney's record of 36% accuracy in the sector includes gaffes like:

And I very much fear that in endorsing Oracle this week, both analysts are risking another addition to a too-long list of failures in this sector.

Why? Well, consider the horns these guys are hanging their bull theses on. Soleil's looking for Oracle to continue rolling up rivals in the software space. And according to Janney, not only will Oracle continue to grow by acquisition in the years to come, but it will maximize the value of this growth by expanding profit margins. How high could these margins go? Janney predicts 45% operating profit margins in fiscal 2012 -- margins that could eventually "go even higher."

Wow
Wow, indeed. It's not enough that Oracle is already earning operating profit margins superior to the giants of the software world -- Google (Nasdaq: GOOG) and Microsoft (Nasdaq: MSFT). Now Soleil and Janney want to see them doing even better than that.

And let's hope they're right. You see, analysts expect Oracle to grow at about 14.6% per year over the next five years. The company sells for about 16 times free cash flow right now, and pays a 0.8% dividend. It's not a crazy-expensive price at 14.6% growth. But for this valuation to be cheap, we really need to see faster growth. We need Janney's predicted 700-basis-point profit improvement to come to pass.

Foolish final thought
Problem is, no company -- not even one as good as Oracle -- can continue growing its profit margins year after year without limit. Ultimately, competitors see the profits you're making and invade your market, whether by building a better digital mousetrap, or simply offering cheaper wares at lower prices. Whatever the case, your profit margin hits a ceiling. It stops growing.

Now, that doesn't mean Oracle's a bad company. (To the contrary.) All it means is that Janney's/Soleil's profit margin projections appear a bit pie-in-the-sky-ish, with the result that, once again, they're likely to miss the mark in rating this stock an outperformer.

While I agree that Oracle is fairly priced today, I personally would wait for a better price before buying.