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.

So here's a question for you...
What's better than back-to-back strong quarterly earnings reports?

Answer: Back to back strong earnings reports, combined with back-to-back analyst upgrades. After beating analyst estimates last quarter, and meeting them in the first quarter of 2008, shares of Motley Fool Hidden Gems recommendation Buffalo Wild Wings (Nasdaq: BWLD) took wing this morning when two of Wall Street's finest upgraded the stock.

Citing "solid" same-store sales, "strong" performance at restaurants newly opened, increased spending on advertising, and rising margins helped by moderating prices for chicken wings, KeyBanc Capital Markets upped Buffalo Wild to "buy." Cowen & Co. followed suit with its own "buy" rating, and although we don't know the specific reasons for the latter upgrade, I suspect that they basically track what KeyBanc was saying.

Let's go to the tape
Of course, the real question is whether the analysts know what they're talking about. So to quality-check these upgrades, let's put the analysts through their paces on CAPS. Here's what we find:

Cowen is ... well, Cowen is just Cowen. It's a banker that gets most of its guesses wrong, and it has the CAPS rank to prove it. With a 65.70 rating, this one's a solid "D" at best. I don't think we need to pay too much attention to this analyst.

In contrast, KeyBanc is a real winner in the stock-picking game. Its 54% record for accuracy fails to impress, but you have to give this analyst a hand for picking some real winners on those occasions when it guesses right. Here's a sampler platter of KeyBanc's better bets:

Hey, hey! Nice call on MasterCard, KeyBanc. And I see you have a pair of decent restaurant picks in your portfolio as well. That's encouraging ... until you see this:

Ahem. So it seems KeyBanc's outperformance does have its limits. This banker is, I fear, a less than stellar restaurant critic.

What's more, I'm going to tempt fate, and the ire of Hidden Gems members today, by arguing that KeyBanc is wrong on Buffalo Wild. I'm tempting fate because KeyBanc is one of "Wall Street's Best" stock pickers, as calculated by CAPS -- and contradicting a proven performer is generally risky business.

Foolish takeaway
I'm not trying to "call the top" on our winnings here, or hurt anyone's feelings. I'm just looking at the numbers and telling you that after today's startling 21% run-up in share price as I write, Buffalo Wild is no longer cheap.

Buffalo Wild now sells for the apparently "wildly" overvalued price of, well, lots and lots of times trailing free cash flow. But I'm not going to blame the company for this. It's simply a consequence of having management continue to pour its operating cash flow back into the business to build new restaurants. Instead, I'll give the company the benefit of the doubt, and value it instead on its GAAP profits.

On that basis, the stock currently trades for nearly 27 times trailing earnings, yet analysts don't expect profits to grow much more rapidly than 23% per year, long-term. Even if Buffalo Wild manages to top those estimates, 27 times earnings is not chicken feed. I see the stock as fairly valued, at best. It's certainly no longer cheap enough to buy.