Get to Know a Guru

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." In our recurring column "This Just In" we cover the most headline-worthy upgrades and downgrades, testing the analysts' logic and examining their records to help you decide whether they're worth listening to.

In "Get to Know a Guru," we go another route. Here, we use upgrade and downgrade news as a springboard to introduce you to some of the lesser-known names in analyst-land. Up this week: Broadpoint Capital.

Profiles in punditry
An unfamiliar name (to me, at least) popped up on MSN Money's tally of analyst upgrades this morning, when "Broadpoint Capital" was reported to have upgraded the stock of Oracle (NASDAQ:ORCL) from "neutral" to "buy." If you're wondering just who the heck Broadpoint is, you're not alone. Fortunately, that's the kind of question I aim to address in this column. So, let's ...

Get to know this guru
Based in Albany, N.Y., Broadpoint is a subsidiary of investment banker First Albany Companies (NASDAQ:BPSG). You could also call Broadpoint "the artist formerly known as First Albany" though, because that was the moniker the bank's equity research division bore until September this year. Whatever name it goes by, Broadpoint focuses its efforts in four broadly defined industries: energy, health care, technology, and consumer/specialty growth. Reviewing the firm's website for more detail on the companies it covers, I found a few items you might find interesting:

• Broadpoint's two favorite sectors, judging from the number of companies it covers in each, are semiconductors and biotech.
• Although the firm includes "energy" among the industries it covers (see the ethanol companies below), I was not able to find a single recognizable energy firm profiled on its site.
• Most surprising of all: Broadpoint covers well more than a dozen stocks recommended by various Fool newsletters. There were more than a few from Motley Fool Rule Breakers and Motley Fool Hidden Gems, which suggests it has a bias in favor of smaller, fast-growing stocks.

Are these guys any good?
But enough about the firm's biography. What we really want to know about is its resume. When Broadpoint Capital speaks, should investors listen?

It's hard to say. Under its previous iteration as First Albany, Broadpoint had a decent CAPS record. The banker hasn't recommended a buy or a sale in two months under its old name, but that name still carries a respectable 74.31 CAPS rating, alongside a less-respectable record of 45% accuracy. Things haven't gone so well since the name-change, however. Broadpoint has been getting twice as many guesses wrong as right lately. And its negative score on CAPS puts it deep within the "Under 20" stratum.

A few of its more notable blunders:

So Broadpoint lost money advising investors to buy Apple. That's quite a trick. But have any of its picks worked out?

Sure, a few. For example, Broadpoint was right about the ethanol bubble (then again, the one-star rating on these stocks tells us this wasn't a particularly tough call to make):

Separating the analyst from the analyzed
"What's in a name?" asks the Bard. Once upon a time, First Albany had a pretty decent record of stock picking. One name change and two months later, this banker is in a deep blue (or red) funk. But will its endorsement of Oracle help pull Broadpoint out of its funk, or just sink it deeper into the red?

The lynchpin of the analyst's thesis goes like this: "Oracle uniquely benefits from lower stock prices, which create more attractive acquisition candidates ... The math is very simple: Oracle acquires software businesses that have a healthy mix of recurring maintenance revenue and a sticky product, so it knows the bottom can't completely fall out of the target's revenue stream."

So Broadpoint is saying that investing in Oracle is essentially a heads-I-win-tails-you-lose proposition. If the software sector soars, best-of-breed Oracle should soar with it. If the industry suffers, Oracle can pick up smaller rivals on the cheap. And actually, I agree with the reasoning in this case. Oracle has plenty of cash on hand ($1.5 billion more than its debt) with which to take advantage of multiple compression among its more vulnerable adversaries. Moreover, Oracle's own stock is selling for a reasonable valuation -- about 17 times trailing free cash flow, versus profits growth that analysts see averaging just less than 15% per year over the next half decade. It all works out to a price-to-free cash flow-to-growth ratio of about 1.2.

I think that's a fair price to pay for an industry leader like Oracle.

Disagree? Feel free -- but please drop by Motley Fool CAPS and tell us why.