This Just In: Upgrades and Downgrades

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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 track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

And speaking of the best ...
Shareholders of salesforce.com (NYSE: CRM) received a double confidence bump yesterday, when a pair of Wall Street analysts voiced strong support for the "on-demand" software provider. Morgan Stanley praised salesforce as "one of the best secular growth stories in software, and ... one of the companies [that will] grow earnings per share through the downturn."

Interestingly, Morgan Stanley had been advising investors to sell salesforce up until yesterday. But with business ticking up, the on-demand software market "expanding," and salesforce "broadening" its own offerings for this market, Morgan Stanley now thinks it's safe to own the shares once more, rating them "equal-weight."

Why not "buy," you ask? Morgan Stanley worries that the attractive economics of this market will draw increased competition from the likes of Microsoft (Nasdaq: MSFT) and Oracle (Nasdaq: ORCL), while a continuing recession could put a lid on potential gains. None of this seems to worry Lazard Capital Markets, however. This banker, which had already rated salesforce a "buy," now thinks it's seeing a spike in demand for salesforce's products, and predicted we will see a 14% uptick in sales for fiscal 2010.

Great news, right? Now's the time to pile back into salesforce.com? Not so fast, Fool. First, let's check the stats, and find out if these analysts are "all that."

Because as it turns out, they're not. Oh, I admit that Morgan Stanley might be a great analyst. It could be the best banker that ever boosted a stock, or dumped a dog ... but if so, we'd never hear of it. Morgan Stanley does not report its ratings to Briefing.com, and so simply has no track record by which to judge it. Lazard, in contrast, does -- and that's the problem.

Let's go to the tape
Of the two analysts rating salesforce this week, Lazard is the more bullish banker. Yet over the past three years, only 47% of Lazard's picks have outperformed the market, placing this banker in the bottom quintile of the investors we track on CAPS. Lazard performs especially poorly when picking software stocks:

Stock	Lazard Says:	CAPS Says:	Lazard's Picks Beating (Lagging) S&P by:
CDC Corp (Nasdaq: CHINA)	Outperform	****	1 point
Electronic Arts (Nasdaq: ERTS)	Outperform	***	(32 points)
VMware (NYSE: VMW)	Outperform	***	(43 points)
VASCO Data Security  (Nasdaq: VDSI)	Underperform	*****	(135! points)

On average, Lazard's batting only .400 in the software space -- great stats in baseball, not so hot in investing. Seeing these statistics, an investor would have to feel just a little bit uncomfortable following Lazard's lead on this week's recommendation, even with (the unknown quantity of) a Morgan Stanley upgrade supporting Lazard's pick.

And yet ...
And yet, that's exactly what I'm going to do -- echo these analysts' recommendation of salesforce.com.

Why? So help me, because the numbers here are just too good to resist. Sure, with a P/E stuck in the triple digits, salesforce doesn't look like much of a bargain at first glance. But remember that salesforce has always looked expensive from a P/E perspective. Meanwhile, under the surface, the company just keeps on churning out more and more cash. As the free cash flow swells, salesforce's P/E shrinks -- and the stock looks cheaper by the day.

Right now, salesforce is generating cash profits in excess of $190 million per year -- nearly four times what it reports as "net earnings" under GAAP. The company sells for about 30 times these cash profits, which seems appropriate in a stock that Wall Street has pegged for 41% annual long-term growth. Yet its balance sheet is bursting at the seams with more than $500 million in net cash and nearly another $500 million in long-term investments.

Foolish takeaway
Net out salesforce's cash stash, and this business isn't just fairly priced -- it's downright cheap relative to how fast most analysts think it will grow.

And if Morgan Stanley and Lazard are right? If salesforce really is at an inflection point, and about to grow its sales faster than everyone else believes possible? Why then, Fools, we just might have found ourselves a bargain.