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 only tell you what the analysts said. We'll 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 worst and sorriest, too.

And speaking of the best ...
Every so often, you see something on Wall Street, and it makes you go "hmm." Yesterday was one of those days for Yours Fool-y. On the first trading day of the week, out of nowhere, four bankers simultaneously initiated coverage on a single company. And not some brand-spanking-new IPO but a stock that's been trading since at least August 2000.

The stock: Motley Fool Hidden Gems recommendation Ceragon Networks (Nasdaq: CRNT  ) . The bankers who'd developed a sudden interest in it: Banc of America Securities, Jefferies, Lehman Bros., and CIBC. And the reason behind their interest? That's today's story.

When bankers (don't) attack
On the surface, these look like pretty run-of-the mill upgrades. Both Jefferies and B of A expect Ceragon to benefit from growth in wireless traffic. Both bankers give the stock a "buy" rating. We don't know precisely why Lehman thinks you should overweight it, but it's a safe guess it's not because it thinks wireless traffic will de-crease. And CIBC -- well, as I pointed out last week, CIBC doesn't rate stocks "buy" or "sell"; it just tells you whether it expects them to outperform their sector. So CIBC's "sector perform" rating could also be deemed bullish if the analyst expects the entire wireless sector to outperform the market.

Still, this leaves the question: What led all these bankers to suddenly slap themselves upside their collective foreheads and exclaim: "Oh, my heavens me! I just realized that Ceragon's a buy!"?

The answer: These four supposedly dispassionate equity analysts all underwrote Ceragon's recent 6.6-million-share stock offering -- an offering that entitled them to buy an additional 990,000 shares for themselves, for subsequent resale to the public.

Gee, I wonder if having a million shares of a company for sale might influence a banker's opinion on whether you should buy these shares?

Let's go to the tape
OK, so the analysts are biased. They're conflicted. But are they right? For clues to the answer, let's check out each firm's record on CAPS (except for CIBC's, which, as mentioned previously, is "invisible" to CAPS):

B of A
CAPS rating: 96
Accuracy: 57%
Best pick/worst pick:

Company

B of A Said:

CAPS Says:

B of A's Pick Beating (Lagging) S&P by:

First Solar (Nasdaq: FSLR  )

Outperform

**

258 points

Security Capital (NYSE: SCA  )

Outperform

*

(83 points)

Lehman Bros.
CAPS rating: 90
Accuracy: 52%
Best pick/worst pick:

Company

Lehman Said:

CAPS Says:

Lehman's Pick Beating (Lagging) S&P by:

MasterCard (NYSE: MA  )

Outperform

***

188 points

E*Trade (Nasdaq: ETFC  )

Outperform

***

(93 points)

Jefferies
CAPS rating: 91
Accuracy: 53%
Best pick/worst pick:

Company

Jefferies Said:

CAPS Says:

Jefferies's Pick Beating (Lagging) S&P by:

DryShips (Nasdaq: DRYS  )  

Outperform

**

208 points

Merge Technologies
(Nasdaq: MRGE  )

Outperform

**

(70 points)

Foolish takeaway
So to sum up, we have here three All-Star investors -- one of which (B of A) ranks among "Wall Street's Best" -- all recommending that you buy Ceragon. Unfortunately, each analyst has a clear conflict of interest: They want to sell you the stock they're recommending you buy.

Meanwhile, the stock in question is burning cash, and sells for -- better sit down -- more than 600 times trailing earnings.

Personally, I'd want a little more than some conflicted analysts' say-so before putting my money into such a company.


Read/Post Comments (4) | Recommend This Article (15)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 20, 2007, at 4:34 PM, moejo61 wrote:

    Thanks for stating what should be the obvious!

  • Report this Comment On November 20, 2007, at 5:04 PM, JJ2000426 wrote:

    Any one thinking about buying FSLR must first read this article and then decide whether this company has a future or not:

    First Solar Vulnerable to a Tellurium Shortage

    http://www.seekingalpha.com/article/54614-first-solar-vulner...

    Not to meantion that FSLR is already extremely over-priced.

  • Report this Comment On November 20, 2007, at 11:20 PM, TMFDitty wrote:

    Stating the obvious is my forte.

    --Rich

  • Report this Comment On November 23, 2007, at 2:28 PM, suchiraman wrote:

    Your article is enlightening, except when you said CRNT should not be bought because of P?E of 600. All companies that go from making no money, to making some money, have a very high P/E ratio. What would be more important is to analyse their growth rate and especially if they are showing an Accelerated Growth.

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