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 worst ...
Shares of Motley Fool Hidden Gems pick Buffalo Wild Wings (Nasdaq: BWLD) were -- pardon the pun -- flying high Tuesday, riding the updraft of a surprise upgrade all the way from "sell" to "buy." That's the good news. And the bad news? That upgrade came from SMH Capital.

I'll bite. Why is that bad news?
Not to put too fine a point on it, SMH Capital is one of the worst analysts on Wall Street. Not only does it have a negative score -- that is, over all its picks it is trailing the market -- but it manages to pick three losers for every two winners.

Take a look at what kinds of picks SMH does get right:

Company	SMH Said:	CAPS Says (5 Max):	SMH's Pick Beating S&P by:
Aventine Renewable Energy (NYSE: AVR)	Underperform	*	47 points
Equitable Resources	Outperform	**	17 points
Questar (NYSE: STR)	Outperform	****	8 points

Basically, SMH does best with energy plays. And even there, the best call it has made was the no-brainer idea to short ethanol. In contrast, look at what it got wrong:

Company	SMH Said:	CAPS Says (5 Max):	SMH's Pick Lagging S&P by:
Brinker  (NYSE: EAT)	Outperform	**	26 points
Juniper Networks (Nasdaq: JNPR)	Outperform	***	20 points
Williams  (NYSE: WMB)	Outperform	****	3 points
NuStar Energy  (NYSE: NS)	Outperform	*****	1 point

Two energy plays again. Hmm. And also a telecom equipment maker. And most pertinent to today's pick: a restaurateur, Brinker. As it turns out, the only other restaurant chain (aside from the unlucky B-Wild) that SMH actively recommends is also one of the worst picks on its scorecard.

So you see why I'm not wild about today's recommendation.

Foolish takeaway
Mind you, that's not to say I hate the stock. My feeling can better be described as "ambivalent." You see, at first glance, Buffalo Wild looks like an entirely valid pick. The stock sells for 22 times earnings and is expected to grow at 23%. That gives it an almost perfect 1.0 PEG ratio, and would ordinarily have me cheering SMH's decision to buy.

Problem is, to achieve this growth, Buffalo Wild has to pour nearly every penny of free cash flow into building new stores. Free cash flow at the restaurateur is almost nonexistent, and I just can't endorse a company without it.