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 ...
The news read like something out of an episode of Little House on the Prairie: Tousle-headed RBC pulled out his penknife and etched a tribute to his gal into the side of an elm tree -- "RBC + EMC" -- then drew a cute little heart around it.

Investment banker RBC Capital Markets issued the ratings equivalent of a "little heart" on electronic storage specialist EMC (NYSE: EMC) Monday, predicting the stock will soar just as soon as management gets around to spinning off fast-growing subsidiary VMware (NYSE: VMW).

Like fellow banker Bernstein before it, RBC made big (if opposite) distinctions between EMC and VMware. But whereas Bernstein hates the EM-scion, RBC loves it. RBC assigns full value to EMC's stake in VMware, and argues that once you back this value out, the rest of EMC is being priced at about half its worth.

Let's go to the tape
You know the drill by now. We've heard what RBC has to say about EMC and its tech wunderkind. Now we'll take a gander at the analyst's record on CAPS in search of clues to how well yesterday's upgrade (to "outperform") might play out.

What we find here is that RBC has quite a good record -- both overall, and with its tech picks in particular. The analyst falls just a few points shy of the top 10% of investors, thanks in large part to picks like ...

... and despite picks such as:

Um ...
Yep, I know what you're thinking. RBC has a fine record, but what about today's announcement? VMware shares are down a stunning 25% (and counting) on a one-two punch of an earnings warning -- first, that this year's sales will fall below previous guidance of 50% growth, and second, that VMware CEO Diane Greene has been booted in favor of Microsoft (Nasdaq: MSFT) veteran Paul Maritz.

That kind of puts a damper on RBC's suggestion that VMware be accorded full value when backing out the imputed price for the rest of EMC. Similarly, it would seem to decrease the likelihood that VMware will be spun off at all -- I mean, if your aim is to cash in on a cash cow, why sell it at a 25% discount?

Foolish takeaway
Suffice it to say that RBC's "buy thesis" got blown out of the water this morning. Lousy luck for RBC, no doubt, and you can bet that the analyst's record will suffer for its bad timing. Foolish investors, however, now have a chance to capitalize on the bad news.

Why? Because VMware's implosion is taking EMC's share price down with it. As of this writing, the parent company's stock sells for about 11 times trailing free cash flow, versus analyst long-term growth expectations of about 12.8% per year. Assuming that growth estimate doesn't get chopped too much based on VMware's warning (and it shouldn't, because VMware is only one-ninth the size of EMC in terms of revenue) EMC shares now look fairly-to-attractively priced.

I'm not saying they won't go lower still, but I am saying that the lower they go, the better a bargain you're getting.