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" ...
... it's getting awfully hard to find any professional investors worthy of the moniker these days. The last few months of market mayhem have laid waste the reputations of such leading lights as JPMorgan and Citigroup.

Other players such as Piper Jaffray aren't faring much better. The banker, which yesterday pulled its "buy" rating on restaurant star Chipotle Mexican Grill (NYSE: CMG), currently ranks in the top 50% of investors tracked by CAPS. Better than the average investor, to be sure, but hardly worthy of the title "best." Sad to say, I fear that Piper's waffling on Chipotle (to mix up my food groups) will do little to help Piper return to the market's good graces. Before I explain why I disagree with Piper's downgrading Chipotle to "neutral," let's take a quick look at this banker's record.

Let's go to the tape
While its higher profile tech picks have performed fairly well in recent months ...

Company	Piper Said:	CAPS Says (5 max):	Piper's Pick Beating S&P by:
Oracle  (Nasdaq: ORCL)	Outperform	****	38 points
Juniper Networks (Nasdaq: JNPR)	Outperform	***	5 points
Cisco (Nasdaq: CSCO)	Outperform	****	4 points

... Piper also has a long record in the less-trendy restaurant sector. Unfortunately, the record there looks less than stellar:

Company	Piper Said:	CAPS Says:	Piper's Pick Beating (Lagging) S&P by:
P.F. Chang's (Nasdaq: PFCB)	Outperform	*	13 points
Red Robin (Nasdaq: RRGB)	Outperform	**	(24 points)
Einstein Noah Restaurant (Nasdaq: BAGL)	Outperform	**	(26 points)

Now, as to why I disagree with Piper's downgrading Chipotle from hot to mild, consider the analyst's own reservations. According to Piper, "same-store sales results, in addition to the influence of other Holiday trends, such as presumably lower banquet/catering sales and conflicting factors related to the gift card redemption cycle," all point to weak near-term results in the restaurant sector.

But that's just the big picture view. Listen now to what Piper has to say about Chipotle in particular: Chipotle is "best-in-class" in the restaurant sector, boasting a "well-positioned concept that generates excellent returns on capital, unmatched operational efficiencies and a long runway of development."

I ask you, Fool, does this sound like the basis for a downgrade? To me, it all sounds like good reasons to own the stock. And indeed, Piper tells us that its "earnings projections for Chipotle specifically remain unchanged." The only reason it's knocking its favorite stock in the sector: "Net net, in this environment we believe it unlikely that Chipotle is throwing a touchdown behind our back."

Foolish takeaway
But here's the thing, Fools. Chipotle doesn't need to throw a touchdown to be worth owning today. The stock sells for a 23 P/E, which seems perfectly reasonable in light of consensus estimates of 23% annual long-term growth. Its free cash flow doesn't quite measure up to its GAAP numbers, but that's because Chipotle is using the operating cash pouring out of the business to fund its ongoing growth ... and it doesn't need to borrow, any more, to help. In fact, it paid off the last of its debt way back in the second quarter of 2007.

As Piper correctly points out, this is a great business. The numbers tell me it's selling at a good price. And as Warren Buffett famously opined: great company, good price -- that's really all you need to beat the market.

On Jan. 12, 2009, Fool co-founder David Gardner, Jeff Fischer, and their Motley Fool Pro team will accept new subscribers to their real-money portfolio service. Motley Fool Pro is investing $1 million of the Fool’s own money in long and short positions in a range of securities, including common stocks, put and call options, and exchange-traded funds (ETFs). They also incorporate proprietary CAPS "community intelligence" data into their research. To learn more about Motley Fool Pro and to receive a private invitation to join, simply enter your email address in the box below.