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 worst and sorriest, too.

And speaking of the best ...
Shares of Motley Fool Hidden Gems recommendation Buffalo Wild Wings (NASDAQ:BWLD) are getting clipped this morning, tumbling 8% in response to an "underweight" recommendation from megabanker JP Morgan. Adding to the confusion, I suspect, is the fact that no one seems to know why JP thinks you should sell Buffalo Wild. None of the mainstream media has yet reported on JP's reasoning. So all we really know at this point is that: (1) JP Morgan hadn't previously covered the stock and (2) now that JP's taken a look, it doesn't like what it sees.

Oh, and (3) when it comes to picking winners (and losers), JP's in the top 10% of CAPS players, boasting a CAPS rating of 90.72. Ugh. Not good.

Let's go to the tape
Or is it? As an individual investor myself, I know how frustrating it can be to see a sell rating stuck on your stock, and not know how it got there. Frustrating, but all too common. When something like this happens, though, there is at least one place an investor can turn for guidance and perspective: Motley Fool CAPS.

In that special community of investors, we've been tracking JP's performance for well over a year, measuring how well its picks have turned out. And you may be surprised to learn that while JP does indeed boast a high CAPS score, it does so more by virtue of verbosity (making many, many picks) than accuracy. When you come right down to it, JP gets only 51% of its calls right -- putting it just this side of a flipped coin for predictive value.

To illustrate, here are a few of the calls it's made right in recent months ...

... and here are a few that it's made wrong:

As you can see, JP Morgan has made a couple of good calls in the restaurant industry (nothing to compare with its brilliant endorsement of MasterCard outside that industry, however). Meanwhile, it's stumbled pretty badly on at least three restaurant picks -- more than wiping out any gains its clients would have reaped from the right calls on Wendy's and Cheesecake Factory.

Foolish takeaway
Judging from today's trading action, investors appear to be taking JP's sell-ish rating on Buffalo Wild on faith. But judging from the analyst's record, I'm going to have to say that faith appears misguided. Moreover, when I look at Buffalo Wild, I see a stock trading at 18 times expected 2008 earnings, and one expected by most analysts to keep on growing those earnings at 24% per year for at least the next half decade. What's not to like in that?

Granted, free cash flow devotees can quibble over the fact that Buffalo Wild's cash profits don't measure up to the net income that it reports under GAAP, but that's not at all uncommon among fast-growing restaurateurs who pour their cash profits back into store expansion. (Cheesecake, for example, has done this for years.)

Buffalo Wild has an entirely reasonable share price, strong growth prospects, and plenty of operating cash flow to fund its growth -- and let's not forget the endorsement of master small-cap growth investor Tom Gardner at Motley Fool Hidden Gems. So I have to contradict JP Morgan today. Buffalo Wild is no "underweight" -- it's a heavyweight at a discount price.

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