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 did.

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 its worst and sorriest, too.

And speaking of the best ...
Bed Bath & Beyond (Nasdaq: BBBY) investors got a rude awakening yesterday, when Wall Street stock shop Morgan Keegan downgraded the shares to "underperform" on fears of -- what else? -- challenging conditions in the home-furnishings sector. According to the analyst, there's a disconnect between investors' bidding up the shares 20% since January and the facts on the ground -- namely, "heavy promotional activity among home retailers competing for store traffic."

"Promotional activity" is, of course, analyst-speak for "sale prices." And as we all know, when a retailer puts its goods on sale, it lowers its profit margins in hopes of making up the difference on volume. Alas, a weak retail environment isn't exactly the best time to hope for sales volume -- hence, the downgrade.

Let's go to the tape
But does Morgan Keegan actually know what it's talking about with regard to home furnishings? Sometimes yes, sometimes no. You see, while the analyst boasts a top-quintile CAPS rating, it leans heavily on oil-related picks such as Transocean (NYSE: RIG) and Noble (NYSE: NE) -- beating the S&P 500 by 65 points and 53 points, respectively -- to get there.

Within the home-furnishings space in particular, Morgan Keegan's record is a bit spottier. It's made some right calls ...

... and some wrong ones as well:

I suppose this shows you the peril of downgrading an entire industry on macroeconomic concerns, and then hoping every pick will work out well. A forest comprises a lot of different trees, you know, and the trick lies in telling the cedar from the scrub.

Foolish takeaway
So which is Bed Bath & Beyond? High-grade cedar or lowly scrub, useful only as fuel for the fire? The stock sells for an apparently reasonable 13 times trailing earnings, versus analyst expectations of 13% annual profits growth over the next five years. That's basically right about where we found it back in early January.

On the other hand, free cash looks clogged. It's flowing at the rate of $297 million over the past year, or about half of net income, so the price-to-free cash flow ratio is twice as big as the price-to-earnings ratio. Finally, the cash that the company has been depending on to fund buybacks to support its per-share earnings growth has now ebbed to the lowest level we've seen since February 2000 (comparing the most recent balance sheet to fiscal year ends). Going forward, it'll become increasingly difficult to maintain the firm's earnings-per-share growth through buybacks. Combined with the margin compression Morgan Keegan now warns us to expect, this suggests lower per-share earnings, a lower stock price -- and perhaps both.

Listen, I know Tom Gardner likes this company -- it's a Motley Fool Stock Advisor recommendation. I'd love to be able to say I like it, too -- but I can't. Don't sell this one yet, but don't buy it, either.