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'll be tracking the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

And speaking of the best...
Shares of Motley Fool Rule Breakers recommendation Polycom (NASDAQ:PLCM) got a shot in the arm yesterday. One of the best stock-pickers in the business, Kaufman Bros., upgraded the stock to "buy." Calling Polycom "the leader in video conferencing," and arguing that this industry will "exhibit strong growth over the next few years," Kaufman argued that the stock has been falling for no good reason, making its valuation now "compelling."

Proving the new maxim that "no good call goes unpunished," the stock promptly reversed course and cratered this morning, costing Kaufman more than seven CAPS points in one day's time.

Huh?
That's pretty much my reaction, too. When a firm with a 95.15 CAPS ratings, and a record of getting its picks right 56% of the time, endorses a stock, I'd expect the market to react more rationally. (Silly Fool.) So perhaps it's worth taking a moment here to review Kaufman's record, and see why investors might want to listen to it today:

Of course, no one's perfect. Kaufman has made its share of goofs as well. For example:

Foolish takeaway
In which table will Polycom appear one year from today? My money's on another win for Kaufman. Sure, Polycom's stock doesn't look terribly attractive based on its P/E. A multiple of 38 times trailing earnings is awfully high for a stock that's only expected to grow at 20% per year over the next five years. Or is it?

Beneath Polycom's surface GAAP numbers, down in its free cash flow, you'll see that the firm is currently trading for just 22 times cash profits. To me, that seems a fair price to pay for a 20% grower. And when you also notice that Polycom outperformed analyst expectations in three of the last four quarters, the stock just might be "cheap" at this price.

Between Kaufman's endorsement, the stock's low price, and the arguments laid out by David Gardner in his May 2007 recommendation of Polycom (if you missed it, you can read the full investment thesis free of charge, just by trying out Motley Fool Rule Breakers), I'm willing to jump on board and give Polycom two Foolish thumbs up.