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." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.

Yesterday, we took a short trip into the future to examine where the computer industry may be heading in 2011 and 2012. (The short version: Thanks largely to Apple (Nasdaq: AAPL  ) , the next few months will be rough for Dell (Nasdaq: DELL  ) and Hewlett-Packard (NYSE: HPQ  ) , but if they can survive long enough, 2012 looks a bit brighter.) Today, we take an even more detailed tour through a subset of the PC industry, courtesy of the analysts who've been laying odds on the makers of computer flash memory.

Fusion gets nuked
Bad news first: If you're a shareholder of data storage specialist Fusion-io (NYSE: FIO  ) , I don't have to tell you that your shares have lost one-third of their value from their highs. What you may not know, is why this is happening. Basically, the answer is that analysts don't like Fusion. On Wednesday, Auriga Securities labeled the stock "very expensive," and warned that not even a 35% long-term growth rate is enough to justify Fusion's stock price. Then yesterday, Merriman Capital seconded the emotion, initiating the stock with a "sell" rating and a prediction that the stock could lose half its value over the next 12 months. If the first "sell" rating worried investors, that second bombshell scared them right out of their socks.

This, as I say, is the bad news. The good news is that not all memory stocks are created equal -- nor are they receiving equal scorn from Wall Street.

Hey! STEC around -- it gets better
Auriga and Merriman agree that Fusion is radioactive, but they part ways when it comes to memory maker STEC (Nasdaq: STEC  ) . Auriga is anti-STEC, arguing that while the company is a leader in enterprise solid state drives (SSD) today, "large new entrants" (read: Intel (Nasdaq: INTC  ) ) will soon be invading its turf. Auriga believes we could see STEC lose half its market share or more over the next three to five years.

On the other hand. Merriman sees the arrival of new players in SSD as good for STEC, because one great way to enter the industry might be to buy STEC. One day after Auriga advised clients to sell the stock, Merriman claimed the other side of the trade, and explained that hard drive vendors or flash memory suppliers may decide to buy STEC in order to gain control over "the best flash-management technology in the market."

 From better to best
Which brings us to flash memory supplier SanDisk (Nasdaq: SNDK  ) . The third industry ratings recipient this week caught an upgrade from a third analyst yesterday, as Avian Securities rated the shares "positive."

Now, I should probably point out that none of the three analysts named above boasts a particularly compelling record on CAPS. Auriga, in fact, ranks in the bottom quintile of investors we track, underperforming at least 80% of its peers. Merriman is a bit better, ranked in the 61st percentile. Of the three, Avian has the best record, perching at 72%. Of the three brokers, Avian is clearly the best -- but that's not why I like its SanDisk pick better than STEC or Fusion-io. I like SanDisk because of the price.

Foolish takeaway
With a projected 14% long-term growth rate, SanDisk is growing significantly faster than rival STEC. Plus, at just over 7.3 times earnings, SanDisk costs less than STEC, which has an 8.8 P/E, and a whole lot less than Fusion-io, which carries a P/E ratio of 367. (Hey, Auriga told you it was "very expensive.") Free cash flow at SanDisk closely approximates reported net income, meaning quality of earnings is high. And owing to its cash-producing prowess, SanDisk boasts a cash-rich balance sheet.

By my estimates, analysts could be overestimating SanDisk's growth prospects by a factor of two, and the shares would still be a good value. Alternatively, if the company achieves the 14% growth target set for it, I could see the shares doubling from here. It's these numbers that persuaded me to buy SanDisk for my own account a few months ago. And it's numbers like these that make SanDisk my favorite data storage stock out of the three companies rated this week.