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 ...
Motley Fool Rule Breakers recommendation Take-Two Interactive (NASDAQ:TTWO) got a much-appreciated boost this morning on an upgrade from "hold" to "buy," courtesy of investment banker Kaufman Bros. Citing the recent Vivendi-Activision (NASDAQ:ATVI) merger as a catalyst, the analyst argues that we may be on the verge of an epidemic of merger fever in the gaming space, and that Take-Two looks good for a takeout target. Even if the buyout scenario fails to materialize, though, Kaufman argues that as a standalone business, Take-Two currently sells for a "discount compared to its likely future profits."

Hold up a sec
What was that again? A discount to its likely future profits? That's a couple of big-time qualifiers you're throwing in there, Kaufman. Before we take you at your word, let's pause for a moment and reflect on how much that word has been worth, historically.

According to Motley Fool CAPS, Kaufman's record looks pretty good. With a CAPS rating of 84.68, this analyst sits comfortably within the top quintile of our players -- a stratum we refer to as the "CAPS All-Stars." And while the analyst isn't always right, it's at least more often right than wrong -- which is more than most analysts can say.

Here are a few of the good calls it's made in recent months:

Three entertainment-industry picks. Three wins. Not bad so far, but how about the 48% of picks (yes, nearly half of them) that Kaufman has gotten wrong?

Hmm. Not so hot in the medical-products sphere.

Foolish takeaway
Lucky for Take-Two investors, their company is more interested in virtual mayhem than in physical healing. As things stand, I think we should give Kaufman more credit than its already-strong CAPS rating suggests, based on its demonstrated area of excellence (gaming). With no profit earned over the past 12 months, and plenty of cash burned, investors have little to go on when deciding whether to invest in Take-Two, so they're likely to depend heavily on analysts' opinions -- especially what analysts think the company might earn next year.

Which brings us back to Kaufman's assertion that Take-Two is cheap "compared to its likely future profits." Right now, analysts agree that it will probably earn about $0.92 per share next year. At today's price, investors are being asked to pay nearly 19 times those putative profits -- for a company that most analysts don't expect to grow much more quickly than 14% per year over the next decade anyway.

To me, that suggests that the stock is overpriced. But remember -- in addition to being a recent Kaufman recommendation, Take-Two is a favorite of avid gamer and growth-stock guru David Gardner, lead analyst at Motley Fool Rule Breakers. If between my opinion (Take-Two is overpriced) and Kaufman's ("discount," "likely," "future profits," yada, yada), you could use a tie-breaking vote, feel free to take us up on a free trial offer and see whether David can sway you one way or the other.