PacSun Ascendant?

If you own shares of Pacific Sunwear (NASDAQ:PSUN), and your neck hurts today, there's no need to call a doctor, because this is only to be expected. The reversal was just that sudden.

After reporting earnings that more or less matched analyst estimates on Thursday, but forward guidance that fell seriously short of what Wall Street wanted to hear, PacSun shares dropped sharply in early morning trading on Friday. Ten percent sales growth was good and all; the fact that PacSun eked out a small rise in same-store sales was also nice to hear; and the $0.15-per-share loss was, if not exactly "good" news, at least in line with what we had been warned to expect.

What sent the shares spiraling downward, one suspects, was the company's promise that next quarter (actually, this quarter -- the one we're in now) it might earn as little as $0.10 per share, at most the same $0.13 it earned in last year's Q3, and in any case far less than the $0.25 that analysts had been predicting.

No sooner had the bad news broke, however, than investment banker Friedman Billings Ramsey rode to the rescue, publishing an enthusiastic endorsement of the stock that it has rated a "buy" for these last nine months. Seeing the stock in freefall, FBR opined that "current prices present an extremely attractive entry point" to "investors with a longer-term horizon."

How long is long, you ask? Well, FBR sees PacSun "meeting and exceeding expectations" as early as Q3 as its business "stabilizes" -- which by the way, matches up well with management's own prediction of a 300-350 basis point improvement in gross margins this quarter being canceled out by a "similar increase in selling, general and administrative expenses." Zero improvement is at least not a deterioration, and so, I suppose, "stable" by definition. Farther down the road, FBR sees PacSun keeping the gross margin improvement, but losing the extra operating expenses as it turns into "one of the most compelling margin expansion, turnaround stories in 2008."

If predictions like these don't explain a 3.3% after-hours decline turning 180 degrees to become a 4.6% rise in share price, I don't know what would.

The thing
The thing is, FBR doesn't have such a great record when it comes to recommending companies that sell apparel for a living. (Actually, with a CAPS rating that currently sits at 43.38, FBR doesn't have such a great record recommending much of anything.)

But apparel companies most of all. According to the Fool's patented analyst tracker, Motley Fool CAPS, FBR hardly ever meets a retailer that it doesn't think you should own -- and to date, that's been bad news for the people who heed its advice. Skimming through the 304 active FBR picks that we track at CAPS, I came up with a good half dozen clothier recommendations. Overall, FBR's in the red three times as often as it's in the green when recommending such stocks -- and by much wider margins.

Coincidentally, and I'm sure this has nothing whatsoever to do with its bullish pronouncement of Friday, FBR is also lagging the market on PacSun by 31 points.

Foolish takeaway
Listen, I'm not saying PacSun's all bad. In fact, over at Motley Fool Stock Advisor, we still have the stock sitting in our portfolio. Nor am I saying that everything's going wrong at PacSun. As I mentioned above, comps did rise last quarter. And the company even generated positive cash from operations in the first quarter of this year.

That said, free cash flow remains deeply negative at $43.7 million year to date, and I, personally, am not at all enthusiastic at this point. Maybe PacSun will indeed prove to be "one of the most compelling ... turnaround stories in 2008." I just wouldn't take FBR's word on it.

So is there anyone whose opinion on PacSun you should trust? As a matter of fact, there is. On Motley Fool CAPS, we're currently tracking one anonymous investor who's beating the market by a good 53 percentage points with his (or is it her?) calls on PacSun. Curious who's got the golden touch with PacSun? Click here to learn the identity of this mystery investor, and what she (or is it he?) thinks about PacSun today.

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 No. 248 out of more than 60,000 rated players. Gap is a Stock Advisor and Inside Value recommendation. Disclosure is always in fashion at The Motley Fool.