This Just In: Upgrades and Downgrades

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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...
As trading ground to a halt for the week on Friday, one banker was starting up a new position in one of our very favorite companies: Motley Fool Hidden Gems recommendation Sun Hydraulics (Nasdaq: SNHY). Strangely, though, the stock didn't do much of anything on the news of BB&T Capital Markets' "buy" rating. Only today is it following the rest of the market northward.

What's the buzz?
Adding to the confusion, I suspect, is that no one seems to know why BB&T thinks you should buy this small-cap manufacturer of screw-in hydraulic cartridge valves and manifolds. None of the mainstream media has yet reported on the banker's reasoning. All we really know at this point is that (1) BB&T hadn't previously covered the stock and (2) now that it's taken a look, it likes what it sees.

Oh, and (3) when it comes to picking winners (and losers), BB&T's slightly better at picking the latter.

Let's go to the tape
According to CAPS, BB&T is a halfway decent analyst, but not much more than that. The banker gets slightly more picks wrong than right and boasts an 81.35 CAPS player rating -- just into "All-Star" status territory. Although the analyst has made a few good picks in the industrial sphere ...

Company	BB&T Said:	CAPS Says (5 Max):	BB&T's Pick Beating S&P by:
DXP Enterprises  (Nasdaq: DXPE)	Outperform	****	15 points
Robbins & Myers (NYSE: RBN)	Outperform	****	12 points
DuPont (NYSE: DD)	Outperform	*****	6 points

... its losers have fared much worse.

Company	BB&T Said:	CAPS Says (5 Max):	BB&T's Pick Lagging S&P by:
PPG Industries  (NYSE: PPG)	Outperform	****	10 points
Drew Industries (NYSE: DW)	Outperform	****	37 points
Dycom Industries (NYSE: DY)	Outperform	*****	42 points

In fact, the more you look at this second list -- "Industries, Industries, Industries," the more you might think a rec from BB&T in this space resembles the Mark of Cain.

Worse, much as I'd love to agree with BB&T on its Sun Hydraulics pick, considering that the company's also a Hidden Gems pick and all, the numbers just don't add up for me. Even though Sun's price-to-earnings ratio of 27 doesn't seem totally out of whack with the 23% growth rates expected out of the stock, the company's free cash flow paints an entirely different picture. According to Capital IQ, Sun has generated less than $17 million in FCF over the past year -- nearly one-third less than its reported net income under GAAP.

Foolish takeaway
The resulting price-to-FCF ratio of 40 is just too rich a price to pay. Mind you, things looked a lot different when we recommended Sun back in September, but I fear that the ensuing 43% run-up may have blinded BB&T to the dangers of Sun's current valuation. Best to wait for better prices before following BB&T into the Sun.