Get to Know a Guru

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." In our recurring column "This Just In," we cover the most headline-worthy upgrades and downgrades, testing the analysts' logic and examining their records to help you decide whether they're worth listening to.

In "Get to Know a Guru," we go another route. Here, we use upgrade and downgrade news as a springboard to introduce you to some of the lesser-known names in analyst-land. Up this week: Sterne Agee.

Profiles in punditry
An unfamiliar name (to me, at least) popped up on MSN Money's tally of analyst upgrades yesterday, when something called Sterne Agee initiated coverage on Deckers Outdoor (Nasdaq: DECK) with a "buy" rating. If you're wondering just who the heck Sterne Agee is, you're not alone. Fortunately, that's the kind of question I aim to address in this column. So without further ado, let's ...

Get to know this guru
Based in Birmingham, Ala., Sterne Agee has been in the investing biz for more than 100 years. According to its website, the firm's 18 analysts spend most of their time researching financial, energy, gaming, specialty consumer products, and specialty retail companies. Potential investments begin appearing on the firm's radar at the micro-cap level of $50 million, and these bankers begin to lose interest around mid-cap valuation -- $3 billion or so.

Pretty run-of-the-mill stuff, for the most part. But don't call these bankers dull. Investors with a quick eye and at least a passing familiarity with Attic Greek will enjoy the firm's Web page that contains two lines that ostensibly discuss "Mutual Fund Revenue Sharing and Other Payments from Mutual Fund Families" and "How to Reduce the Cost of Investing in Mutual Funds" -- both transliterated into Greek font if you're using Internet Explorer. Hilarious.

Are these guys any good?
But enough about the firm's biography and foreign alphabetical flourishes. What we really want to know about is its resume. When Sterne Agee speaks, should investors listen?

Probably not. Over the eight months that we've been tracking Sterne Agee's performance, the firm has racked up three strikes against it:

• A negative Motley Fool CAPS score.
• A 29.07 CAPS rating.
• And a sub-50% record for accuracy (meaning you're statistically better off flipping a coin than following this firm's advice).

Out of seven active recommendations tracked by CAPS, Sterne Agee is currently "in the green" on only three of them -- and one of these is for Deckers, less than 24 hours old. The other two are:

	Sterne Agee Says:	CAPS Says:	Sterne Agee's Pick Beating S&P By:
Gildan Activewear (NYSE: GIL)	Outperform	*****	22 points
True Religion (Nasdaq: TRLG)	Outperform	***	9 points

In contrast, the firm's firmly in the red on:

	Sterne Agee Says:	CAPS Says:	Sterne Agee's Pick Lagging S&P By:
Jos. A. Bank (Nasdaq: JOSB)	Outperform	****	24 points
Christopher & Banks (NYSE: CBK)	Outperform	***	20 points
Ameristar Casinos (Nasdaq: ASCA)	Outperform	****	8 points

Separating the analyst from the analyzed
Overall, Sterne Agee's record leaves much to be desired. But what about its recommendation of Deckers in particular?

According to the analyst, "the success of UGG [is] not ... a fad." Convinced that Deckers is here to stay, Sterne Agee points to UGG's continued "strong" popularity, and accelerating international sales. It predicts 50% growth in international sales this year, and says "2008 should prove to be an exceptional year" for Deckers.

Sterne Agee had better be right about that, because at today's price, there's precious little room for error -- and no margin of safety whatsoever. Deckers shares currently command a lofty 44 P/E, which seems a bit rich for a 21% grower. To give you some perspective, oft-maligned Apple (Nasdaq: AAPL) also carries a 44 P/E, yet is expected to grow faster than Deckers, at 23% per year over the next half decade.

Worse, in contrast to Apple, which generates significantly more free cash flow than it reports as "earnings" under GAAP, Deckers' cash profits lag its net earnings by a wide margin. On a price-to-free cash flow basis, Deckers trades at a 112 multiple, making the stock look nearly three times more expensive than it appears from the venerable PEG perspective. To justify that valuation, Deckers isn't just going to need an "exceptional" 2008. Nothing less than "phenomenal" will suffice.

Can Deckers do it? Lace up your arguments, and then run on over to Motley Fool CAPS and tell us what you think.