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.

What's in a name?
Not much, answered stock picker Bear Stearns yesterday, as it declared that shares of electronics retailer Best Buy (NYSE: BBY) are nothing of the sort. With consumers cutting back on discretionary spending, Bear snarled that Best Buy is in for tough times. Bad enough, in fact, that Bear dialed back its rating on the stock, all the way from "outperform" to "underperform."

Bear thinks that factory sales of electronics will drop up to 50% this year and have an even gloomier future. "Over the next couple years, we believe the mass merchant, direct and warehouse club sectors will see more favorable share shifts as the velocity of the product cycle slows and commoditization of key products (e.g., TVs) occurs." Emphasis added, but yes, you read that right. Bear thinks we're facing a two-year trend, in which retailers such as Costco (Nasdaq: COST) and Wal-Mart (NYSE: WMT) siphon off Best Buy's sales.

No disrespect to either of those worthies (after all, like Best Buy, Costco is a Motley Fool Stock Advisor pick, and Wal-Mart got the nod from Motley Fool Inside Value), but Bear is making bold assertions here, arguing that the nation's preeminent electronics retailer will lose ground to a couple of glorified discount shops. Before you go sell a quality operator like Best Buy on Bear's say-so, you owe it to yourself to check out the analyst's record.

Let's go to the tape
As you may recall, we checked in on Bear just last week, when we put its bearish call against Starbucks (Nasdaq: SBUX) to the test. What a difference a week can make! Last Wednesday, Bear was on top of the world, sporting a 94.67 CAPS rating, 54% accuracy, and a bright, shiny Wall Street's Best icon.

No more. Today, the firm's sub-50% accuracy and 82.28 CAPS rating bear-ly earn this analyst a place among the CAPS All-Stars. Six of Bear's last eight recommendations turned sour, moving into Bear's "loss" column, alongside predictions such as:

Begging the ASPCA's indulgence for kicking a Bear while it's down, I have to say that I doubt yesterday's diss of Best Buy will do Bear's reputation any good. Will consumer electronics sales decline in 2008? Yeah, maybe. Will Costco and Wal-Mart prosper as consumers try to stretch their discretionary spending further? Sure, that could happen. But does any of this mean that Best Buy will underperform the rest of the stock market?

Hardly.

Foolish takeaway
Listen, folks. In the final analysis, everything comes down to valuation. Taking a quick look at today's price, Best Buy seems at very worst a "hold," and in all likelihood a "buy," to me. The stock sells for just 15 times trailing earnings, and whatever the coming 12 or 24 months hold for Best Buy, analysts believe this stock will ultimately grow its profits at 15% per year over the next half-decade. That works out to an eminently fair PEG ratio of 1.0. (Free cash flow enthusiasts, take note -- the last time Best Buy gave us a cash flow statement to look at, free cash flow was improving as well).

By encouraging investors to focus on short-term misgivings, Bear is missing the big picture. Worse, investors frightened by Bear's growls will miss out on the long-term growth of this market-leading retailer. Don't get caught in this bear trap, Fools. Best Buy deserves its name.