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...
Soleil Securities shined a spotlight on Google (NASDAQ:GOOG) this morning, and investors are glowing -- but for the life of me, I don't know why. See whether you can figure out what Soleil's trying to say here, in a report excerpted by StreetInsider.com: "Based on our analysis, the current $475 share price requires a 10-year annual EBITDA growth rate of 13%, which is supportable by historical growth rates of predecessor ad-driven media silos, implying that investors are getting Google's growth optionality upside for free."

Um ...
"Silos"? I thought those were Archer-Daniels-Midland's (NYSE:ADM) bag. I'm not at all clear on what they have to do with Internet ads. And as for "predecessors," I thought Google was one of a kind. Unless you're talking Yahoo! (NASDAQ:YHOO) -- which might resent the implication -- it seems there aren't a whole lot of predecessors to be comparing the Internet goliath to. And don't even get me started about "growth optionality upside."  Seems to me that this unorthodox stock shop, which aggregates reports from 30-odd "independent boutique firms," must have pulled this particular report from somewhere in the south of Europe -- because it's all Greek to me.

So why should investors care what that analyst-speak, originating from a boutique firm and captured by Soleil, says about Google? I mean, isn't this the same company I dismissed as the "CAPS laughing stock" just a few short months ago?

Indeed they are
But my, how things have changed. Ranked in the bottom half of investors in April, Soleil has enjoyed a surge in success of late. As of today, the firm boasts a CAPS rank in the top 10% -- and an enviable record of 56% accuracy on its picks.

As for the four Soleil picks we profiled as illustrative of its problems back in April, here's how they fare today:

With the sole exception of Regal Entertainment, whose lead over the S&P has been pared down somewhat, Soleil's picks are aging quite well -- each and every one is doing better today, relative to the rest of the stock market, than it was in April.

Getting back to Google
So Soleil's record is no longer in tatters, but that still leaves us with the mess that is its buy thesis. What are we to make of that?

Translated into English, Soleil seems to be trying to tell us that investors have priced Google as if they expect it to grow by 13% going forward. I'm not so sure that thesis holds up in the light of day, however.

Most analysts expect Google to put up a 29% pace of annual growth over the next five years. To me, that means the company's basically fairly valued at today's price of 32 times trailing earnings. And if you dig a little deeper, you'll find investors are even more optimistic than that. Valued on its cash profits, Google trades at 36.4 times trailing free cash flow -- a tidy premium to growth expectations.

Foolish takeaway
Now, maybe that's a fair price to pay for the undisputed King of the Internet. Great company, good price, and all that. But I fail to see how paying a premium to growth expectations gives investors any "growth optionality upside for free." Seems to this Fool that if you follow Soleil's advice today, you're paying through the nose.