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 ...
Payroll outsourcer Paychex (NASDAQ:PAYX) got a 2% bounce in share price, courtesy of an upgrade from Bear Stearns on Wednesday. According to the analyst, he's been waiting a long time to endorse this check-writer, calling it "a high-quality company that generates a lot of cash, speaks to investors in a straightforward way, and doesn't rely on any one customer too heavily" in an AP story that relayed the upgrade.

So if Paychex has always been this good, why wait till now to rate it an outperformer? It's simple, really. Premium companies generally carry premium price tags, and Bear Stearns has been holding off on endorsing Paychex until its stubs were selling for an attractive price. That day, it seems, has come. Or has it?

The decision
Before deciding whether to heed Bear Stearns' advice and buy shares of Paychex, an investor owes it to himself or herself to do a little due diligence -- not just on Paychex itself, but on the record of the firm recommending Paychex. Just how likely is it that Bear Stearns has "called the bottom" on this stock that, to date, has underperformed the S&P by nearly 20 percentage points over the past 52 weeks?

Let's go to the tape
For clues to Bear Stearns' prescience, we turn once again to CAPS, where we've been following the firm's tracks for the past nine months. What we've learned over that time is that although Bear Stearns has a decent record, it's far from the best stock jock on the Street. In fact, its 76.56 CAPS rating puts Bear Stearns in 6,762nd place in the rankings (out of just fewer than 29,000 lay and professional players who are ranked).

Worse, with an accuracy rating just shy of 46%, you're better off flipping a coin than listening to Bear Stearns' advice.

What's got Bear Stearns trapped down here in sub-All-Star land? Let's find out:

That said, a 76-ish CAPS rating is far better than some other Wall Street players we're tracking have managed. A few of the picks that keep Bear Stearns' head above water include:

Reviewing Bear Stearns' record, I can't say with any certainty that the firm is definitely wrong about Paychex. On the contrary, I actually agree with the analyst that this is one high-quality company it's recommending. What worries me, however, is that Bear Stearns may be jumping the gun on calling the bottom here. Reviewing Paychex's financials, I see that the shares trade for a whopping 27 times trailing earnings -- a bit pricey for a stock that most analysts expect to grow no faster than 15% per year over the next five years.

Although it's true the firm generates more cash profits (free cash flow) than it reports as net earnings under GAAP ($557 million vs. $517 million in the past 12 months), that still yields a price-to-free cash flow ratio of 27. Long story short, I do not believe Paychex sells for enough of a discount to justify Bear Stearns' endorsement today.

Looking for a third opinion? On CAPS, we've identified the player with the highest performance to date on Paychex -- currently outperforming the market by 11 points with his or her pick.

To learn whether this mystery stock picker expects Paychex to bounce, just click here. Oh, and don't be surprised when you learn that she or he is no Wall Street wizard at all, but an ordinary investor like you and me.

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 ranked No. 491 out of nearly 29,000 ranked investors.