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 ...
Shares of Motley Fool Hidden Gems recommendation FormFactor (Nasdaq: FORM  ) are soaring today, lifted by a sharp about-face from Arlington, Va.-based stock shop Friedman, Billings, Ramsey. According to FBR, semiconductors are shrinking -- in size this time, not necessarily sales. And the smaller chips are going to need new testing equipment, which FormFactor is especially well-suited to provide. FBR believes that this will translate into new orders and, thus, additional revenue for the maker of semiconductor wafer probe cards in the second half of this year. If that happens, it will demand a reversal of the analyst's earlier pessimism.

Betting on the likelihood of good news, FBR has already upgraded the shares, all the way from "underperform" to "outperform."

Investors are cheering the 7% rise (as of this writing) in stock price, but before we join in the applause, let's take a moment to review the analyst's record and ensure that this upgrade is all it's chipped up to be. 

Let's go to the tape
Turns out FBR is not exactly at the top of the analyst heap when it comes to picking stocks. The banker boasts a respectable, if not remarkable, CAPS rating of 77.64, hurt in part by its record of making more calls wrong than right. Pushing FBR's accuracy record down below 48% have been such unfortunate picks as:

Company

FBR Said:

CAPS Says (5 Max):

FBR's Pick Lagging S&P by:

ChipMOS Technologies (Nasdaq: IMOS  )

Outperform

****

47 points

ON Semiconductor (Nasdaq: ONNN  )

Outperform

***

30 points

National Semiconductor (NYSE: NSM  )

Outperform

**

19 points

Hmm. Since we're talking about a semiconductor rec today, I must say the picture is looking pretty bleak for FBR so far. But reserve judgment for a moment as you examine FBR's wins column:

Company

FBR Said:

CAPS Says (5 Max):

FBR's Pick Beating S&P by:

Advanced Micro Devices 

(NYSE: AMD  )

Underperform

**

55 points

MEMC Electronic Materials (NYSE: WFR  )

Outperform

****

37 points

Applied Materials

(Nasdaq: AMAT  )

Outperform

****

19 points

Aha! So FBR does get semi calls correct -- and it proves itself capable of outperforming the market handily when it does. So does this make FBR a semi-expert?

Perhaps, depending on how you interpret the pun. But one thing's for certain: No matter how mediocre the company's overall record as a stock picker, and no matter how hit-or-miss its chip ideas have proved to be, when it comes to one stock in particular, FBR is a bona fide genius. That stock is FormFactor.

You see, in addition to tracking active stock recommendations such as those we've outlined above, at Motley Fool CAPS, we also maintain archives of past picks and how they panned out (another pun there). In this regard, FBR has proven remarkably astute at both picking and panning FormFactor. In January 2007, FBR recommended the stock, and rode it to 11 points of market outperformance in just a little more than two months. A few months later, FBR re-upped its position on FormFactor, but this time on the short side. Recommending that investors sell the stock earned FBR another 36 points of market outperformance through today's upgrade.

In short, while I wouldn't necessarily follow FBR's lead on most recommendations, these guys so far deserve a good listen when they're talking FormFactor. It doesn't hurt my enthusiasm over FBR's call that the stock is trading for an ultralow valuation of 13 times earnings, despite expectations of nearly 20% annual growth over the next five years.)

Who else loves FormFactor? The friendly Fools at Motley Fool Hidden Gems , that's who. Get their latest thoughts on the company when you take a free 30-day trial to the service.

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 ranked No. 866 out of more than 93,000 players. The Fool has a disclosure policy .


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