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 -- but not always.

In "This Just In," we won't just 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.

Speaking of the worst ...
Shares of Motley Fool Hidden Gems pick FormFactor (Nasdaq: FORM) plunged this morning in response to a downgrade to "perform" from Oppenheimer. Citing "checks at the Semicon West trade show last week" that showed shipments are down 15% to 20% sequentially, the analyst warned that this quarter's results will fall towards the "low end" of management’s predicted $40 million to $55 million in revenues. Oppenheimer further warned of an "overheating issue" with FormFactor's one-touch Harmony probe cards. This could give rise to higher warranty costs -- hurting earnings even more than the sales decline would portend -- and market share erosion to boot.

Oppenheimer pulled no punches on its bottom-line: "We see no buy thesis here."

Well, I do
The situation Oppenheimer describes sounds grim, no doubt. Fortunately for FormFactor shareholders, though, Oppenheimer doesn't have a particularly stellar record of being right about these kinds of things. Before I explain why I believe Oppenheimer is wrong on FormFactor in particular, let me review for you this analyst group's record in the semi-sphere:

Company	Oppenheimer Said:	CAPS Says (5 Max):	Oppenheimer's Pick Lagging S&P by:
SiRF Technology  (Nasdaq: SIRF)	Outperform	****	77 points
ON Semiconductor  (Nasdaq: ONNN)	Outperform	****	14 points
Marvel Technology (Nasdaq: MRVL)	Outperform	****	2 points

On average, Oppenheimer guesses wrong on its picks just over 50% of the time, and ranks in the bottom 20% of investors tracked by CAPS. Albeit, it has made some right calls among heavy users of semiconductor products:

Company	Oppenheimer Said:	CAPS Says (5 Max):	Oppenheimer's Pick Beating S&P by:
Motorola (NYSE: MOT)	Underperform	**	10 points
Qualcomm (Nasdaq: QCOM)	Outperform	***	22 points
Nokia (NYSE: NOK)	Outperform	****	38 points

Still, the closer you get to pure-play semi, the more dead circuits Oppenheimer tends to produce.

Forming a buy thesis
Moving from general to specific, let's now take a closer look at FormFactor. Citing a single quarter's decline in shipments and a (presumably fixable) problem with the firm's Harmony product line, Oppenheimer concludes that there's just no reason to own FormFactor today.

I disagree. In fact, I see two reasons to own the stock:

• Valuation: First, the stock is selling for just 20 times trailing earnings right now. For a company that most analysts expect to grow its profits at 22% per year over the next half decade, that's cheap. (Caveat: Free cash flow is not so strong -- the price-to-free cash flow ratio here is 33.)
• Cash: Speaking of cash ... you're soaking in it. Or rather, FormFactor is. The company boasts a market cap comprised of $556 million cash, equivalents, and short term investments. Fully 61% of the company's market cap is backed up by greenbacks. As a result, its enterprise value to free cash flow ratio is just 12.7.

So Oppenheimer, if you're looking for a buy thesis, here's a little something to get you started: FormFactor is a company with short-term, fixable troubles, which once fixed, should permit the shares to rise. Thanks to these troubles, it's cheap. Dirt cheap.