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 ...
Shares of on-demand software specialist salesforce.com (NYSE:CRM) took a break yesterday from the breathtaking 60% upwards rush they've enjoyed over the past seven-plus months. The occasion for the breather: a downgrade to "market perform" from Wall Street analyst Bernstein.

Aha! A buying opportunity!
Hold your horses there, Tex. Yes, I know what you're thinking. You've clicked through that link above, and you've discovered that Bernstein ranks in the bottom half of investors on CAPS, right? You've noticed that the analyst sports a negative score versus the market, with its picks on average underperforming the S&P by a fraction of a percent. And so you've concluded: "If Bernstein doesn't like it, I love it!"

All of that is a logical reaction. It's the same one I had on seeing the downgrade. But not so fast -- there's more to this story than just "lousy analyst + downgrade = buy, buy, buy!"

Let's go to the tape
It's true, of course, that Bernstein has a less-than-stellar track record on CAPS. It's true, too, that picks such as the following haven't helped:

Knowing that Bernstein is opining on salesforce.com, and also knowing that "virtual software" pioneer Google is up there among the analyst's top losers, gives me an absolute case of the chills. And I don't warm up much knowing that this analyst makes up for its apparent lack of tech savvy with some pretty good oil picks:

So far, so lousy
Everything seems to be working against my agreeing with Bernstein. Well, almost everything: When it comes to salesforce.com, this analyst has been right on the money.

After Bernstein recommended that investors buy this clearly overpriced stock back in April 2007 -- the price-to-earnings ratio ran to five digits once the company reported earnings for the first quarter of 2007 -- salesforce.com performed admirably. By the time the analyst pulled its outperform rating yesterday, the stock had beaten the market by more than 50 points. In this case, I have to believe that regardless of Bernstein's general record, the analyst clearly understands this company better than most.

What's more, Bernstein's argument against buying more of the company today has a ring of logic to it. The analyst cautions that salesforce.com has yet to prove that it can perform well in a time of recession. Pointing out that small- and medium-sized businesses contribute "about two-thirds" of salesforce.com's revenue, Bernstein seems worried that this side of the company's customer base may lack the ballast to weather the coming economic storm.

Foolish takeaway
Considering that the stock still carries a triple-digit P/E, and given that it looks fairly valued at best, with its price-to-free cash flow ratio of 47, versus anticipated annual earnings growth of about 48%, I'm inclined to agree with Bernstein on this one. Salesforce.com isn't the obvious "sell" that it seems, but it's not cheap enough to buy today, either.