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 ...
Just a few short weeks ago, I penned one of my occasional "Get to Know a Guru" columns, this one featuring investment banker Friedman Billings Ramsey. Describing FBR as a small firm with "big ambitions," and one possessing a stock picking record that was "none too shabby," I went on to describe a few of its better-performing recommendations of recent months. One of these, of course, was none other than Motley Fool Hidden Gems pick Nuance Communications (Nasdaq: NUAN  ) .

Well, lo and behold, Nuance is no longer on FBR's buy list. In fact, you may have heard the audible thump! Friday as FBR dropped Nuance down to a neutral rating, helping to shave $200 million worth of market cap off the company in the process.

Why the downgrade? Basically, FBR didn't like Nuance's $265 million purchase of Time Warner's (NYSE: TWX  ) Tegic Communications subsidiary, announced the previous day. Rather than invest further in cutting-edge technology for voice control on mobile phones and PDAs, FBR thinks Nuance should "focus on its core business of helping call centers handle phone calls without a human presence with voice-recognition software."

That's funny -- I wasn't aware that this was Nuance's "core" business at all. Or at least that it was any more "core" than the firm's key Dragon Naturally Speaking voice-to-type software, its Dictaphone medical-dictation business, or, for that matter, the deals it has signed with clients such as Nokia (NYSE: NOK  ) and Kyocera (NYSE: KYO  ) to enhance voice-activated functions on their phones. But then again, as a professional stock jock, FBR does do this for a living, whereas I just dabble. So it seems logical that the analyst should know more about investing than do I. Just to be safe, though, let's take a quick detour over to CAPS, where we're tracking FBR, and see how well the firm's record bears out that hypothesis:

Player: Friedman Billings Ramsey

• CAPS rating: 88.46
• Accuracy: 51.12%
• Rank: 3,570 out of 30,919

Scanning the firm's active picks, we find that in the tech arena, it's chosen firms such as:

Stock	FBR Says:	CAPS Says (Out of 5):	FBR's Pick Beating (lagging) S&P By:
McAfee (NYSE: MFE  )	Outperform	*	14 points
Applied Materials (Nasdaq: AMAT  )	Outperform	***	6 points
Oracle (Nasdaq: ORCL  )	Outperform	***	(6 points)

Getting back to Nuance
Despite sporting an accuracy record little better than that of a flipped coin, FBR has built up an impressive reputation on CAPS, because when it's right, it's often very right. On Nuance in particular, since recommending the stock eight months ago, FBR's pick has outperformed the S&P 500 by a good 37 points -- a score that our Nuance score leader would smile upon with condescension, but still pretty good. For that reason, I wouldn't be too quick to discount FBR's downgrade of the stock.

Then again, over at Motley Fool Hidden Gems, co-lead analyst Bill Mann has an even more impressive record on Nuance than do the folks at FBR. Bill's two separate recommendations of Nuance are beating the S&P 500 by an average of 96 points each. Given a choice, I'd listen to Bill over FBR on this one.

And what does Bill have to say about Nuance? Claim your free 30-day trial to the service, and find out.

Fool contributor Rich Smith does not own shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 1,893 out of more than 31,000 rated players. Time Warner is a Motley Fool Stock Advisor recommendation. The Fool has a disclosure policy.