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 worst ...
Shareholders of Motley Fool Rule Breakers pick Akamai Technologies (Nasdaq: AKAM) are cheering this morning, their spirits lifted by an upgrade out of Wall Street wizard Piper Jaffray. Citing a recent survey of 1,000 "streaming media professionals" that suggests Internet traffic is accelerating despite the economic downturn, Piper upped Akamai to "buy."

What's the one got to do with the other? Well, as the analyst explains it, Akamai's business is making all that extra Internet traffic flow freely. It makes little difference to Akamai what kind of traffic is flowing -- the company profits whether it's helping consumers buy iWidgets on Amazon.com, or watch digital clips on YouTube. Thus, tough economic times that drain dollars from consumer wallets won't necessarily hurt Akamai; as long as people have enough cash to pay their Internet bills, keeping themselves on the Internet, whether they buy anything while there or not. 

Deja vu
Does any of this sound familiar to you? Because to me, it sounds like just one more verse in a song, the chorus to which goes: "This company is recession-proof." We've seen how well that's worked out for other supposed economy-impervious companies (PetSmart, anyone?) Let' just say I have my doubts about how well Piper's theory will work in practice.

Let's go to the tape
Fortunately, thanks to the magic of Motley Fool CAPS, we don't have to rely on doubts to evaluate the analyst's chances of success -- we can examine its actual record. What we find there, though, hardly excites. On average, Piper gets 59% of its picks wrong, and on average, its picks lag the market by about 1% apiece. Both facts have helped lead Piper down into the ranks of the bottom 20% of investors.

Specifically, while navigating the pipes of the Internet, Piper has made such wrong turns as:

In contrast, Piper plays a somewhat different tune when reading from the solar power score sheet:

Were Akamai planning to "diworsify" its business into the field of thin film solar power receptors, I suspect I'd be writing something different about Piper today. But you'll understand if I entertain some skepticism over the analyst's opinion that a lousy economy won't touch Akamai in its present form.

Foolish takeaway
I understand that I may bruise some feelings over at Motley Fool Rule Breakers by saying this, but it must be said: Piper's endorsement of Akamai is no reason to buy the stock. What's more, the stock's valuation fails to justify an investment at this time.

Mind you, I'm not talking about the company's 55 times P/E ratio. That's scary when measured against 25% projected annual profits growth, but personally, I focus less on GAAP net income and more on free cash flow when valuing a stock. By that measure, I actually peg Akamai at about $135 million in trailing free cash flow -- roughly 35% better than net income. Problem is, this still leaves the stock trading for 38 times its free cash flow, and for a 25% grower, that's too rich by far.