This Just In: Upgrades & 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 tell you what the analysts said, and stop there. No, we're here to hold Wall Street to account. We're going to tell you what the analysts said and then show you whether they know what they're talking about. To help, we'll enlist 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 worst and sorriest, too.

Speaking of the best ...
Today, we examine that most interesting of equity animals: the IPO. A little more than one month ago, the Nasdaq welcomed a new member onto the public stage, unmanned aerial vehicle (UAV) maker AeroVironment (NASDAQ:AVAV). No sooner had the stock priced at $17 than it debuted at ... $25 -- a 47% jump in price in less than a minute of trading. Of course, it was all downhill from there. The stock proceeded to close the day down 4% from its opening price, and it's lost a further 12% in the succeeding weeks.

Bad news for early investors? Certainly. But with the carnage out of the way, the question to ask today is whether patient buyers now have an opportunity to snap up a bargain. Yesterday, four of Wall Street's finest weighed in on this question, issuing a series of "initiating coverage" announcements (hold your horses, upgrade hounds. They'll get around to the up/down game soon enough). Each of Goldman Sachs, Jefferies, and Stifel Nicolaus gave AeroVironment the equivalent of a "hold" rating yesterday. Friedman Billings Ramsey, feeling a little friskier, tagged the company an outperformer. "Good news!" you might think. Three out of four analysts surveyed think you can't lose money on AeroVironment -- and the fourth says "it's a winner." But does that really mean it's time to buy?

Hold your horses, again
You see, these aren't just any analysts calling AeroVironment a hold by a 3-to-1 margin. These are four of the six firms involved in underwriting AeroVironment's IPO (the two holdouts being Thomas Weisel and Raymond James, and I expect we'll be hearing from them soon.) As such, I fear that these guys may be a bit conflicted. Certainly, they want their "baby" to succeed in the public markets, and that desire may cloud their judgment regarding the firm's prospects. Even worse, three of these firms, inclined to favor AeroVironment, can only bring themselves to give the stock at most a half-hearted "hold" rating, which should give investors further pause.

Before deciding how much weight to give the ratings, investors might want to look at how well these analysts have done in past picks. To wit, here are the best (and worst) picks made by each firm since we began tracking them on Motley Fool CAPS six months ago:

Admittedly, all of these firms have proved their worth in the stock-picking game. Each scores in the top 20% of CAPS players, with Stifel the undisputed leader at a combined rating of 97.46, Goldman a ways back at 91.81, Jeffries nipping at its heels with 90.77, and FBR bringing up the rear with its 86.82 score. Each of the firms is right slightly more often than it's wrong, with accuracy ratings ranging from FBR's "just barely" 50.36%, to Stifel's fairly decent 56.63%.

That said, the results shown in the table above prove that each firm is capable of making some really awful calls from time to time. That fact, plus the inherent conflict involved in their (less than enthusiastic) endorsement of AeroVironment, argues in favor of caution for individual investors. If you pay attention to analyst ratings at all, I'd suggest waiting for someone a bit less "involved" in the company to make a call before making your own.

In the meantime, you've got 58 fellow investors waiting over on CAPS who've offered to help you out by contributing their own thoughts on AeroVironment. Of these, seven are All-Stars just like the investment bankers noted above -- and every man jack of them says AeroVironment is destined to fly. For more details, and to read the thoughts of the incomparable Steve819, rated the 39th best CAPS player of all time, visit CAPS now.

Fool contributor Rich Smith does not own shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked 18 out of nearly 24,000 raters. Select Comfort is a Motley Fool Hidden Gems pick. The Fool has a disclosure policy.