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 ...
"Best" is a bit strong of a word to describe our featured analyst today. Let's just call Stanford Research better. As in: "With a record of 51% accuracy and a CAPS rating of 59-even, Stanford is better than most other investors."

That makes it all the more strange to note that a "buy" rating from this middling analyst appears to be the only explanation for iRobot's (Nasdaq: IRBT  ) shocking rise in stock price yesterday. No other news broke in the past 24 hours.

For that matter, Stanford's initiation of coverage on iRobot itself hardly qualifies as news. Most of the major news outlets that cover this sort of thing say little more than that the rating happened. A precious few mention that Stanford expects iRobot to hit $18 per share at some point. I had to search high and low across the Internet to find anything more than that -- and I finally came up with a single tidbit on BloggingStocks.com, which confides that Stanford is basing its optimism on the belief that "better-than-expected military robot sales will allow the company to beat 2008 consensus estimates."

Let's go to the tape
OK. Nice to know. But just how good is Stanford at outguessing the rest of Wall Street's expectations? Well, the analyst has made some good guesses:

Company

Stanford Said:

CAPS Says
(5 Max):

Stanford's Pick
Beating S&P by:

SunPower
(Nasdaq: SPWR  )

Outperform

***

2 points

Oracle
(Nasdaq: ORCL  )

Outperform

****

16 points

Force Protection
(Nasdaq: FRPT  )

Underperform

***

30 points

But if you'll pardon my saying so, it's made some really boneheaded moves as well:

Company

Stanford Said:

CAPS Says (5 Max):

Stanford's Pick Lagging S&P by:

SiRF Technologies

Outperform

****

67 points

salesforce.com (NYSE: CRM  )

Underperform

*

56 points

Microsoft (Nasdaq: MSFT  )

Outperform

***

9 points

All of this adds up to Stanford's aforementioned record of getting it right about 51% of the time. Not great. Not horrible. Just OK.

So what about iRobot?
Will Stanford's predicted 40% rise in stock price pan out for iRobot? Without knowing what "unexpected" sales Stanford is talking about, I cannot say. I can say that I'm skeptical that iRobot can deliver a surprise on its deliveries, simply because iRobot has always been very good at laying out its expectations in plain view.

As far back as February, management warned us to expect a weak Q2, followed by improved performance later in the year. Granted, investors nonetheless were shocked -- shocked! when iRobot's Q2 numbers indeed came in weak. So I suppose there's a chance they'll be equally stunned if or when iRobot delivers on promised improvements later this year.

Foolish takeaway
My guess, though, is that toward the end of this year, we'll find Stanford proved right for the wrong reasons. You see, to my mind, the big bad news of Q2 was not the expected quarterly loss, but rather the unexpected $1.8 million charge to earnings that made the loss so large.

iRobot took the charge against the eventuality that bankrupt Linens 'n Things might fail to pay for the Roombas it had ordered from iRobot. But since then, LNT has secured $700 million in "debtor-in-possession financing" from GE (NYSE: GE  ) Capital. My guess -- and this remains a guess, because iRobot gave me the silent treatment when I posed the question earlier this month -- is that with this financing in hand, LNT will be able to make good on at least some of its debt to iRobot. If I'm right, that could boost this year's profits back toward their previously expected levels.

How's that for expecting the unexpected?

Force Protection used to be a Motley Fool Rule Breakers pick; iRobot remains so to this day. Microsoft is a Motley Fool Inside Value selection.

Fool contributor Rich Smith owns shares of both iRobot and Force Protection. You can find Rich on CAPS, pontificating under the handle TMFDitty, where he's ranked No. 2,441 out of more than 110,000 players. The Fool has a disclosure policy.


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