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 pick Zumiez (Nasdaq: ZUMZ  ) plunged yesterday on a one-two punch of bad news. First and most materially, the "action sports" retailer reported 10.2% sales growth for the month of June ... but a 3.4% slide in comparable store sales. (Hardly the sort of results we expect out of a go-go growth stock.) Second, johnny-come-lately stock shop William Blair & Co. waltzed in with a downgrade to "market perform" after the fact. (Hardly the sort of advance warning we expect out of a paid investment advisor.)

Let's go to the tape
Then again, William Blair wields far from the sharpest pencil on Wall Street trading desks. Reviewing the analyst's record on CAPS, we learn that William Blair ranks in the bottom 20% of analysts whose performance we track, and gets more of its picks wrong than right.

Now to give credit where it's due, I should point out that William Blair has a stellar record in the education sphere, where it's pinned the tail on such winners as:

Company	William Blair Said:	CAPS Says (5 max):	William Blair's Pick Beating S&P by:
Capella Education  (Nasdaq: CPLA  )	Outperform	*****	60 points
American Public Education	Outeperform	****	30 points
New Oriental Education  (NYSE: EDU  )	Outperform	****	2 points
Blackboard (Nasdaq: BBBB  )	Outperform	****	1 points

Unfortunately, Zumiez is not an educator. It's a retailer. And within the retail and fashion industry, William Blair has had quite a run of bad luck. With the notable exception of a winning bet placed on Urban Outfitters, William Blair's retail picks generally look like this:

Company	William Blair Said:	CAPS Says (5 max):	William Blair's Pick Lagging S&P by:
Luxottica Group  (NYSE: LUX  )	Outperform	****	17 points
lululemon athletica (Nasdaq: LULU  )	Outperform	**	15 points
Bare Escentuals (Nasdaq: BARE  )	Outperform	***	11 points

Getting back to Zumiez
So I have to say William Blair's off to a pretty bad start here. It lacks a lot of credibility in this industry. It was late to the game with its downgrade. So is there any reason we should listen to William Blair now?

Actually, yes there is, and it was evident long before Zumiez warned of weak comps on Wednesday. Reviewing the firm's financials for the past two quarters, you can see that sales are up an average of 13%, while inventories have climbed by an average 16% year over year. Inventory growth accelerated in the most recent quarter, and June's sales report, while exceedingly short-term in focus (yet another reason to question William Blair's sudden downgrade), suggests that the divide between these two metrics may widen in the current quarter.

Or, in plain English: Zumiez doesn't appear to be selling as much as it should. Its unsold merchandise is piling up. And if things don't improve, Zumiez will eventually be forced to mark down the unsold goods, sacrificing profits just to move them out the door.

Foolish takeaway
Selling for 17 times trailing free cash flow versus 22% estimated long-term growth, Zumiez shares are beginning to look fairly priced -- but it took Thursday's sell-off to get us down to this price. If you're looking to get into this stock, its current struggles may be the chance you've been waiting for.

Still, I'd suggest waiting for the price tag to get slashed once or twice more. After all, why buy "fair" when "cheap" seems to be heading your way?