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 worst ...
Shares of Motley Fool Rule Breakers pick Sigma Designs (Nasdaq: SIGM) soared yesterday. Unfortunately, the catalyst for the breakout appears to have been a single upgrade ... from a singularly poor analyst, at least according to CAPS.

It's not that BWS Financial is always wrong, mind you. To the contrary, this stock picker gets its picks right about 52% of the time. BWS also has quite a history with Sigma Designs in particular; last time around, its recommendation of Sigma Designs booked 137 points' worth of market outperformance.

BWS's other picks don't always fare so well. Current winners are heavily weighted toward the biotech sphere:

Company	BWS Said:	CAPS Says (5 Max):	BWS's Pick Beating S&P by:
ISIS Pharmaceuticals  (Nasdaq: ISIS)	Outperform	***	49 points
Gilead Sciences  (Nasdaq: GILD)	Outperform	*****	51 points
Cephalon  (Nasdaq: CEPH)	Outperform	*****	15 points

But even in biotech, BWS has taken a disturbing number of wrong turns. Meanwhile, in "tech tech," the losers pile up with distressing regularity:

Company	BWS Said:	CAPS Says (5 Max):	BWS's Pick Lagging S&P by:
Zoltek  (Nasdaq: ZOLT)	Outperform	***	30 points
Amazon.com (Nasdaq: AMZN)	Underperform	**	33 points
Rambus (Nasdaq: RMBS)	Outperform	**	35 points

To be fair, we also have BWS down for an outperform call on Amazon, which beat the market by 16 points in the short time that call was active.

But leaving aside BWS's record for a moment, what does the analyst have to say about Sigma Designs today? According to BWS, "The inventory issue SIGM was going through at the start of the year has been [resolved] ... IPTV subscriber levels have continued to increase ... [and] SIGM remains the market share leader in IPTV." More importantly, the shares are dirt cheap. Says BWS, "The downside is limited with upside opportunity."

Is that true?
In part, at least. Maybe BWS knows something I don't know about the inventory situation, or maybe not. It certainly looked out of control the last time Sigma Designs reported earnings, though. As fellow Fool Anders Bylund wrote in his discussion of the May earnings report, "an inventory problem at one of the company's largest IPTV customers" limited Sigma Designs to "only" 58% sales growth in the first fiscal quarter. Meanwhile, inventories more than doubled.

But the company does remain the market leader in IPTV. And its shares are looking awfully attractive by just about any metric I can think of. The stock carries a single-digit price-to-earnings ratio despite growth estimates in the low 20s. And notwithstanding the surge in inventories that depressed cash production, free cash still flows freely at this little tech upstart. The price-to-free cash flow-to-growth ratio here comes to a saliva-inducing 0.5.

Foolish takeaway
So is BWS a lousy stock analyst? Sometimes it is, and sometimes it isn't. But you don't need to be particularly smart, accurate, or even consistent to recognize that at this price, Sigma Designs is a screaming buy.