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 its worst and sorriest, too.

And speaking of the best ...
UBS, one of the best stock pickers in the business -- these guys just miss out on carrying the coveted "Wall Street's Best" icon on CAPS -- downgraded shares of Cisco (NASDAQ:CSCO) this morning. Citing its own "industry checks" on how Cisco's sales are running, UBS argues that the current quarter will see a 4% rise in sales, versus the 6% that most people on Wall Street are expecting. UBS further opines that Cisco will earn just $1.50 pro forma (Latin for "pay no attention to the stock options behind the curtain") this year, and $1.64 next year.

Pretty specific numbers, eh? Seems UBS has Cisco pegged down to the penny -- or does it? To get a better idea of just how good this "best" stock picker is at its trade, let's take a quick look over some of its past predictions.

Let's go to the tape
Wow. Pretty good, as it turns out. With a CAPS rating of 90.92, and a record of guessing right a respectable 52% of the time, UBS certainly deserves being close to earning a "Wall Street's Best" icon -- although, to be honest, its rivals aren't putting up much of a fight. What's more, UBS has a sterling record in the tech industry, including such winners as:

Granted, UBS has made its share of blunders, too.

But hey, everybody makes mistakes. Why, we even picked Netgear for Motley Fool Stock Advisor. Could be both of us were a bit early on that one, though the company's stock has been up and down over the past year.

Back to Cisco
Key to UBS's pessimism on the Internet-equipment titan are its doubts regarding Cisco's 12% to 17% revenue growth goal. The analyst sees little chance that the company will hit that target without either sacrificing margins (presumably to gain market share) or making acquisitions (with attendant depreciation expense -- which also hurts margins).

I suspect UBS that is right. But then again, few analysts see Cisco growing its profits much faster than the consensus 13.6% per year over the next five years, so the way I look at these things, UBS's pessimism is already built in to the stock price.

Foolish takeaway
Speaking of which, with $9.4 billion in free cash flow over the past year, Cisco's stock price doesn't look at all unreasonable to me. We have a stock priced at 15.8 times its free cash flow (with a boatload of cash in the bank, which lowers its enterprise value-to-free cash flow ratio), and expected to grow at 13% going forward. To me, that's not a screaming buy, but rather a pretty decent "hold" of a stock -- and that's precisely what UBS is saying today.

I agree.