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 worst and sorriest, too.

And speaking of the best...
In another of those quirks of "logic" that only make sense to Wall Street bankers, RBC Capital Markets upgraded Chinese search star Baidu.com (Nasdaq: BIDU  ) to "outperform" this morning ... and simultaneously lopped 10% off its price target for the stock.

Why does RBC think you should "buy" a stock that may be worth 10% less in a year than a stock rated "hold"? Danged if I know. I lack the CFA required to follow that logic, or the MBA necessary to arrive at the precise "$361 per share" figure that RBC now posits for Baidu. I simply know that the analyst's arguments make a whole lot of sense. According to RBC, "very few companies on the Internet enjoy every secular, macro, and seasonal factor[s] working in their favor, and fewer have Baidu's growth profile."

That sentiment echoes the arguments Fool co-founder David Gardner made when recommending Baidu for Motley Fool Rule Breakers back in November 2006. Anointing Baidu "better than Google," David pointed out that the Chinese search giant helped lop one-third off Google's own market share in Beijing, and controlled two-thirds of the market itself. The stock has tripled since David picked it.

Let's go to the tape
But enough about David's record. That speaks for itself. Now that Baidu has already tripled, you really want to know whether it will go up just because RBC says it will.

At first glance, I'd have to say that RBC's chances don't look good. Although the analyst ranks among the top 15% of CAPS players, it gets barely more of its picks right than wrong. In certain sectors -- alternative energy, for instance -- RBC does particularly poorly:

Company	RBC Said:	CAPS Says (out of 5):	RBC's Pick Lagging S&P by:
Plug Power (Nasdaq: PLUG  )	Underperform	*	6 points
SunPower (Nasdaq: SPWR  )	Outperform	**	22 points
Evergreen Solar  (Nasdaq: ESLR  )	Underperform	**	27 points

Granted, RBC redeems itself in large part through its success with Internet plays:

Company	RBC Said:	CAPS Says:	RBC's Pick Beating S&P by:
Sohu.com (Nasdaq: SOHU  )	Outperform	***	101 points
Yahoo! (Nasdaq: YHOO  )	Outperform	**	24 points
Google (Nasdaq: GOOG  )	Outperform	**	17 points

I'd like to say that this bodes well for this morning's endorsement of Baidu ... but I'm sorry. I just can't bring myself to do that.

As much as I admire RBC's record on Internet stocks (and by the way, RBC called a triple on Baidu itself with a previous endorsement, back in April 2007), I can't bring myself to agree with this broker today. The reason: valuation, plain and simple.

You see, based on the fiscal 2007 results Baidu reported yesterday, the company generated just $56.3 million in free cash flow last year. That's 35% less in free cash than the company reported in net earnings under GAAP. If the stock's (new) 103 trailing P/E worries you, its 158 price-to-free cash flow ratio should send you running away screaming in terror.

Foolish takeaway
I hate to tell you this, folks, but even super-optimistic analysts are pegging Baidu's growth at "only" 60% per year over the next several years. Fantastic as that rate appears, (a) it's uncertain -- because the future always is -- and (b) it doesn't justify paying triple-digit multiples for a stock. David's endorsement notwithstanding, and despite RBC's also-impressive record on Internet stocks, this is one buy rating I just can't get behind.