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 worst and sorriest, too.

And speaking of the best...
I've written for the Fool for more than three years now, covering stocks from Apple to Zebra Technologies, and many in between. It's not often I come across a name that totally throws me for a loop -- which is why I was so surprised yesterday, when I read the announcement that Goldman Sachs had upgraded Bare Escentuals (NASDAQ:BARE) to a buy rating.

"Goldman who?" I asked.

Just kidding. Actually, I'd never heard of the rate, not the rater. But while there's no comparing the two firms on the basis of name recognition, it's nonetheless surprising that Bare slipped under my radar. With a few quick web-clicks, I learned that Bare is no fly by-night small cap, but rather a $3.5 billion-market cap company, selling close to $400 million worth of cosmetics annually. Pretty hard to miss, in retrospect. Then again, as I further discovered, Goldman had a bit of an edge on me in "discovering" Bare. It was co-lead underwriter on Bare's September 2006 IPO!

Now, I know what you're thinking: "Well of course Goldman's rating them a buy. It brought the company public, probably owns a basket of shares itself, and has an interest in seeing the stock rise now." Well, yes and no. Yes, Goldman's conflicted. But to give credit where credit is due, up until yesterday, it was one of only two of the seven companies involved in Bare's going-public to rate the stock "neutral," as opposed to "buy" from the get-go. (The other stand-up broker, perhaps not coincidentally, is CAPS standout Banc of America Securities.)

So what convinced Goldman to change its mind on Bare? According to the analyst, Bare has an "abundance" of growth opportunities both in the U.S. and abroad. Although it trades at a very high price-to-earnings ratio -- a pricey 60 times, but who's counting? -- Goldman thinks Bare's earnings guidance doesn't factor in several of the company's new initiatives, which could boost profits going forward.

But is Goldman right? That's the real question. To help answer it, we turn once again to Motley Fool CAPS for a peek at Goldman's track record. There, we find that the broker has done its clients proud since last we checked in, boosting its CAPS rating 373 basis points to an impressive 91.73 -- putting it in the top 10% of CAPS players. A few recent winners that have helped its record include:

Of course, it hasn't been all IPOs and caviar for Goldman. Witness a couple of picks that haven't panned out:

Goldman's on a winning streak, folks, but whether its upgrade of Bare will extend or extinguish that streak, I cannot say. Certainly, Bare's P/E ratio gives cause for optimism -- it's more than twice Bare's consensus estimated growth rate, and from where I sit, a "PEG" ratio near 2.0 looks mighty steep.

That said, there are few analysts better-placed to understand Bare's business than its underwriters. What's more, holding off more than six months before tagging Bare a "buy" suggests there might be a method to Goldman's apparent madness. I can certainly understand if investors decide to view Goldman's rating with skepticism, based entirely on fears of bias. But if that's the case, you know what to do: Click on over to CAPS and get yourself an unbiased opinion from the 70 investors who've already contributed their thoughts on Bare. Like the man says: "It don't cost nuthin'." So do yourself a favor and visit CAPS now.

Make seven picks on CAPS by April 24 and we'll send you a free copy of The Motley Fool Five Star Report. Inside, you'll discover how to use CAPS as a research tool, and you will receive a recommended five-star CAPS pick poised to beat the market for the next decade or more -- one that you can easily translate into profits for your real-world portfolio. Click here to get started 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 228th out of well over 26,000 raters. The Motley Fool has a disclosure policy.