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 …
If you're looking for the best stock picker on Wall Street, I'm afraid Argus Research isn't it. ("The best," that is.) But Argus is the one that made the recommendation to buy Cisco Systems (NASDAQ:CSCO) yesterday, so we'll work with what we've got.

The world economy has been in a bit of a funk lately. But according to Argus, that's not necessarily bad news for Cisco. Bad economies have a tendency to separate corporate chaff from wheat, you see. And with telecom equipment vendors like Nortel and Motorola (NYSE:MOT) on the ropes, Argus believes that "cash-rich Cisco" will be able "to gain further market share, sustain its business development and advanced R&D pipelines, and ... extend its leadership as the network becomes more flexible, far-reaching and -- for both carriers and vendors -- lucrative."

Much as I'd love to stop right here and end this column on an optimistic note, things aren't that simple anymore. Used to be, investors had to just take analysts at their word -- buy when they said "buy"; sell when they said "hold" -- because we had no other choice. But ever since Motley Fool CAPS arrived on the scene, we've lost the right to blindly follow Wall Street's instructions. CAPS makes it so easy to quality-check an analyst's record before following its advice that it's just plain irresponsible not to make the effort. So ...

Let's go to the tape
Argus Research may not exactly be a household name, but in fact, the analyst has been in business since 1934. Here at CAPS, we haven't been watching the company quite that long, but we have recorded its performance ever since the analyst began submitting ratings to Briefing.com eight months ago. And we've seen Argus develop quite a track record in the telecom and Internet spheres. Some of its picks have been good 'uns ...

... and some not so good:

In the end, though, the picks have balanced out such that overall, Argus ends up with a record of almost precisely 50% accuracy on its picks. Which is right on target if you're a coin about to be flipped -- not so hot if you're an analyst collecting a paycheck for your work.

And yet ...
While I admit to being less than impressed with Argus' past performance, I'm considerably more enthusiastic about its prediction that Cisco will outperform the market in the future. Why? Because in this recommendation, on this company, Argus is taking the long view so rarely practiced by Wall Street analysts.

The analyst is not getting frightened off by expectations of "continued sequential revenue declines and concomitant margin pressure for the network giant" -- which Argus concedes are risks over the next few quarters. Instead, Argus focuses on its belief that "Cisco is well positioned for competitive outperformance in its fast-evolving markets." And if that's true -- as I also believe it is -- then Cisco's price today offers investors an attractive entry point into this story.

Crunching the numbers
Based on today's share price, therefore, the stock is selling for a mere 11.5 times its earnings -- reasonable (but not strike-me-dumb cheap) if Cisco lives up to consensus expectations for 8.5% annual earnings growth over the next half-decade.

But this story gets better. Consider: Over the past 12 months, Cisco generated $11.2 billion in free cash flow. Plus, Cisco has more than $22.5 billion in net cash on its books. Subtract that from the firm's market cap, and we're looking at a company whose enterprise value is less than 5.5 times the cash it generates over the course of a year. Without belaboring the point, Fools, that's an ultra-cheap price to pay for such a dominant player.

And it's the reason I think Argus is right to recommend Cisco today.