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Editor's note: A previous version of this article mistakenly included text from another article. The Fool and the author regret the error.

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.

And speaking of the worst ...
Already sagging in the wake of reports that no, Virginia, Liberty Media (Nasdaq: LMCA  ) does not intend to take Sirius XM Satellite (Nasdaq: SIRI  ) private, shares of the satellite-radio star took another hit yesterday. For this, you can thank the (un-)friendly analysts at Miller Tabak, who pulled their buy rating on the stock and downgraded to neutral.

Swiping away two of the three legs underlying the Sirius buy thesis, Miller argues that not only is Liberty unlikely to try to acquire Sirius in toto, but the analyst also warns that Sirius itself is unlikely to be buying back shares because "at this point such a move would play into LMCA's strategy." Reducing its share count through buybacks, you see, would increase the proportion of Sirius shares controlled by Liberty, which already owns a 40% "as-converted" stake in the company. Assuming that's a result Sirius would rather not happen, a buyback would appear unlikely.

Two down, one to go
Of course -- Miller's observation notwithstanding -- even minus two legs, there's still one leg remaining: valuation. So how sturdy is that one looking?

Despite downgrading the stock, Miller left its price target on Sirius intact at $2.55 per share. This number suggests there's still about 9% upside from Sirius' current share price, and considering that I've been a pretty public backer of Sirius stock in months past, you might expect me to agree with that assessment. You might expect me to keep on cheering for Sirius and encouraging investors to stick around for the 9% gain.

I don't.

Valuation matters
Granted, Sirius' rising levels of profitability mean that the stock, priced at 53 times trailing earnings just a few months ago, now sells for only 33 times trailing earnings. That sounds like a good thing, but there's one "problem" with it.

The reason I've backed Sirius for so long, you see, is that historically its reported earnings didn't give the company enough credit for the real free cash flow it was generating behind the scenes. Unlike supposed rival Pandora Media (NYSE: P  ) , which continues to report losses and burn cash, Sirius was actually a cash-generating machine in disguise.

This all changed in Sirius' most recent financial report, however, which showed that Sirius' reported earnings of $427 million have finally overtaken actual free cash flow ($406 million). As a result, shares that look overpriced at 33 times earnings (relative to 20% growth expectations) are actually even more expensive when valued on free cash flow. While I certainly prefer Sirius over its upstart Internet-radio competitor, my feeling now is that the profits Sirius had to offer us last year have already been captured by the stock's 30% run-up -- profits that, incidentally, anyone who followed my advice and bought Sirius last year will already have pocketed.

Foolish takeaway
There's no denying the pleasure of buying a stock and watching it outperform the market by a healthy 19-percentage-point-margin, as Sirius has done over the past few months. It's certainly tempting to hope that there are more profits in store, and to hang around in expectation of the same. Unfortunately, the numbers I'm looking at tell me that by now, the vast majority of the profit that was there for the taking at Sirius has already been taken.

Now's not the time for false hope. Now's the time to count your winnings. The time to declare victory and go home. Stay tuned, though. If better prices return, I'll be sure to let you know. Follow my actions on Sirius on my Motley Fool CAPS account, right here.

Looking for a safer way to make money in this market than jumping into and out of Sirius? Perhaps a portfolio of strong, steady, dividend payers will do the trick? Read our new report (it's free, by the way), and we'll tell you all about nine companies we know of that have rock-solid dividends.

Fool contributor Rich Smith owns no shares of (nor is he short) any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 369 out of more than 180,000 members. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Read/Post Comments (5) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 05, 2012, at 3:16 PM, Ostrowsr wrote:

    Sorry Dude. You just described ISRG when it was just getting started. And a $40 price compared to a now $600(?) price makes me want the newly, future high flier MAKO. But I hope you talk down the price a little. So wise investors can all buy more.

  • Report this Comment On April 05, 2012, at 3:30 PM, southernbeachguy wrote:

    The question is do I now start listening to these Analyst that have been wrong most of the past 4 years or do I now start paying attention to what they say? Ok, I have made my decision!

    Since I am up 487% over the past 42 months by not agreeing with anything they say, I'll choose not to listen to them for the next 42 months. My guessing seems to be better than theirs. Sirus has still got a way to run UP.

  • Report this Comment On April 05, 2012, at 3:48 PM, BigBlitz wrote:

    Mr. Smith, you posted this same article 2 days ago. What is your problem? Post it again because you couldn't get a ticker right in the other one?

  • Report this Comment On April 05, 2012, at 5:48 PM, usubanas wrote:

    "I'm publicly making a prediction that MAKO Surgical will underperform the market from here on out -- and rating the stock "underperform" on CAPS for that reason."

    sounds good! but even better, can you short it in real life? and then let us know how that works out for you :)

  • Report this Comment On April 06, 2012, at 12:06 AM, TMFDitty wrote:

    My mistake, everyone. The first time this article went up, it was a "work in progress" version that was half today's column, half text from Tuesday's column.

    What you see now is the final version.


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