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 at all.

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: DA Davidson.

Profiles in punditry
An unfamiliar name (to me, at least) popped up on MSN Money's tally of analyst upgrades Tuesday, when DA Davidson pulled its buy rating on Dolby Labs (NYSE:DLB) and downgraded the stock to neutral. If you're wondering just who the heck DA Davidson is, you're not alone. Fortunately, that's the kind of question I aim to address in this column. So without further ado, let's...

Get to know this guru
CAPS has the following profile for the firm: "DA Davidson offers financial consultants that advise on stocks, bonds, government securities, mutual funds, insurance, and annuities, among other financial products and services. The equities research team conducts fundamental research and analysis in evaluating investment opportunities. Analysts go beyond the raw numbers and assess developing trends in the companies in which they research. This approach has made DA Davidson analysts a credible resource on companies in the Northwest. Analysts often specialize in identifying undervalued blue-chip companies that pose for great investments with minimal risk."

With a little extra digging, I was able to turn up a bit more facts about this firm. Based in Great Falls, Mont., employee-owned-and-operated DA Davidson has been in the investing biz for 72 years. Nothing unusual so far. But here's something you may not have known: The company's corporate parent also operates a travel agency. So Davidson doesn't just help you make money -- it can also help you enjoy your winnings in exotic locales around the globe.

Are these guys any good?
That's the real question, isn't it? Before Davidson Travel can sell you a travel package, DA Davidson needs to deliver the goods in the stock-picking department. Problem is, DA Davidson's not so hot in this regard. On the contrary, this investment banker boasts:

• A negative CAPS score
• A 33.54 CAPS rating
• And a sub-50% record for accuracy

Among its picks that have failed to pan out, we find:

That said, the firm's accuracy is just a couple of points short of breakeven; it does pick some winners from time to time, as well:

Separating the analyst from the analyzed
But for Davidson's decision to ditch Dolby this week, that stock would have sat pretty high in its "win column" for current recommendations. The fact is, among the positions it has closed, Davidson is batting 0.727, with a record of 16 wins and only six losses. One of those wins was Dolby, on which Davidson racked up 51 points' worth of market outperformance in less than four months. Considering Davidson's record on Dolby so far, it seems to me we should give this downgrade some serious consideration.

With a 40 P/E, but most analysts predicting growth of no better than 18% per year over the next half decade, Dolby looks overpriced. The free cash flow situation looks similar -- Dolby trades for 39 times its cash profits. The only thing I see that might suggest Davidson jumped ship too soon is the fact that Dolby has a history of making the analysts who follow it look pretty silly. Over the last nine quarters, it's beaten estimates every time, by margins ranging from 26% to 100%.

Foolish takeaway
If Dolby is to prove Davidson wrong, it will need to keep on beating those estimates with a stick. Anything less, and this stock is due for a fall.

Disagree? Feel free. Come on over to CAPS and tell me why.