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 ...
Swiss securities specialist UBS is having a busy week. On Monday, it hit U.S. Steel with a sell rating on fears the company's shares had risen too far, too fast, in the hopes of a buyout offer that may never come. Yesterday, UBS switched industries, and sentiments, initiating coverage of Under Armour (NYSE:UA) with a buy rating. Commenting that the sportswear maker has "revolutionized" athletic apparel, UBS argues that while the firm does trade for a high multiple to earnings, it's worth the price.

I have my own thoughts on UBS' argument, but before addressing its merits, let's use CAPS to take a quick look at the firm's record as a stock picker:

Player: UBS

• CAPS rating: 93.44
• Accuracy: 53.3%
• Rank: 2,021 out of 30,796

Examining a few of its recent picks in the retail clothing industry, we find:

I see two ways of interpreting this data. Either you can say: "Nike's the only relevant pick, because it's the only firm of the bunch that focuses on sportswear as UA does." Or you can just say: "Egads! These guys are really bad at picking clothes companies."

Personally, I take the latter view, with my opinion being in part colored by UBS' most recent endorsement of Under Armour, and in particular, its valuation argument. According to the analyst, Under Armour deserves to be trading for its current 57 times trailing earnings because it will grow sales at as much as 35% annually over the next five years. While I agree that 35% growth would be impressive if achieved, I still think we need to see two things for Under Armour to be fairly valued today. First, profits growth must match or exceed sales growth. Second, free cash flow has to back up the accounting profits.

As things, stand, however, Under Armour has no free cash flow -- on the contrary, it's burning cash. And by UBS' own admission, even Under Armour's accounting profits are unlikely to keep pace with sales growth. UBS pegs likely future profits growth at just 30%, which falls below its hoped-for sales growth. (Meanwhile, the consensus of UBS' fellow analysts calls for slower growth still -- 25% per annum.)

Foolish takeaway
Put it all together, and I have to agree to disagree with UBS. In so doing, I'm also breaking with the growth-stock team at Motley Fool Rule Breakers, which has kept Under Armour in its portfolio for nearly one Fool year now. To both these esteemed teams of investors, I say: "Revolutionary" or not, Under Armour is just too darned expensive -- and that just might be why the S&P has outperformed it by 7 percentage points since Under Armour entered the Rule Breakers portfolio.

(Psst! Don't be disheartened. The Motley Fool Rule Breakers picks as a whole are still beating the S&P by 4 percentage points. Even if Under Armour is lagging now, one day it may turn in a performance as good as that of the four two-baggers and three three-baggers that we've picked to date. Find out who these superstar stocks are when you take a free trial of the service.)

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. 2,441 out of more than 30,000 rated investors. The Fool has a disclosure policy.