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

And speaking of the best...
Somebody check the calendar, please. Does it still read 2010, or have we time-warped back to 2000, and nobody bothered to tell me? Because the latest batch of stock recs out of Brean Murray this week have a distinctly "dot-com bubble era" feel to them.

Initiating coverage on a trio of Chinese online ad plays, Brean started off slow yesterday, hanging a "hold" rating (and no price target) on Sohu (Nasdaq: SOHU). From there, Brean got steadily more optimistic, placing a buy rating on Sina (Nasdaq: SINA) -- "poised to emerge as a winning play" -- and positively pounded the table in favor of Baidu (Nasdaq: BIDU).

According to Brean, Baidu benefits from "a large number of catalysts," including online ad growth, opportunities to increase page views, higher "cost per click" on its ad rates, and rising market share as Google's (Nasdaq: GOOG) Chinese star falls. In a Chinese advertising industry that Brean says will grow 30% or more this year, Brean believes Baidu's the clear winner; and that the market leader will "separate itself from the pack and continue to capture a disproportionate amount of spending."

Brean's conclusion? Baidu's a buy. This stock's going to -- better sit down for this -- $800.

800... dollars?
Yes. Per share. And before you discount that number as pure fantasy, remember that Brean ranks in the top 10% of investors tracked on CAPS. Most of the time, when Brean says a stock is going up, that's precisely what it does.

Just not this time
So why am I so pessimistic about this forecast? While Brean Murray may be a great analyst in many industries, Internet Software and Services is not one of them. There's no nice way to say this: Within the ISS sector, Brean's record is utterly abysmal. It's made 11 picks in the sector over the past four years, but it's gotten a grand total of 31% of them right. A few of the losers:

Simply put, Brean's wrong about these kinds of stocks more than twice as often as it's right -- and this is one of those times.

Great company, lousy price
Baidu is a great company. It's a Motley Fool Rule Breakers recommendation and a terrific performer, up more than 600% since we first picked it nearly four years ago. This company has come close to doubling its earnings on average every year for the last five years, and most analysts on Wall Street think it will keep on growing at 42% per year from here on out. But Fools, at $705 and change, Baidu's already getting a mite pricey for my taste, and as for $800 a share...

Bite your tongue!
I know, I know. Baidu's also the "Chinese Google." It had better be, because from what I hear, the original Google may not be operating in China for much longer. Baidu the biggest online player in the world's biggest country. Its Q1 report yesterday was pretty much perfect.

But consider this: With $261 million earned over the last 12 months, the stock's already trading for 45 times forward earnings after yesterday's post-earnings run-up. Does anyone seriously believe that this price is reasonable? That Baidu can "grow into its valuation?"

I do...
... but I also think that will take a whole lot longer than most people believe. 43% growth projections are all well and good, but if the online ad market is only growing 30% in China (and only for one year), that's going to be a tough trick to pull off. Plus, the simple, hard fact of the matter is that the bigger a company gets, the harder it is to maintain the growth. Even Google itself is now pegged for a 20% forward growth rate.

To my Foolish eye, Baidu needs to be pretty much perfect to justify Brean's endorsement. It will need to grow faster than 43% to render Brean's multiple reasonable. But it seems more likely to me that sooner rather than later, Baidu will slow down.

And when that happens, owning a stock that's priced for perfection won't be a pleasant experience.

Baidu's stock has nearly tripled over the past year. How do you know when "the train has left the station" and it's too late to buy? Here's how.