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 tell you only what the analysts said. We 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 ...
As the trading week came to an end on Friday, everyman's broker Charles Schwab (Nasdaq: SCHW) enjoyed a new beginning -- as a buy-rated stock in Stifel Nicolaus' portfolio.

Why did Stifel recommend a stockbroker in the middle of a recession? No one's quite sure of the logic on that one. The announcement from Briefing.com doesn't give an explanation, and the usually insightful write-up on StreetInsider.com keeps mum this time as well (but I'll venture an explanation of my own in a minute).

Let's go to the tape
Even without a "buy thesis" to accompany this buy rating, this one's worth a look. You see, at first glance, Stifel's record may not inspire a lot of confidence. Just 11 one-hundredths of a percent separate Stifel's record from an even 50-50. Yet the analyst ranks in the top 20% of investors thanks to a series of brilliant calls that have paid off big.

I get the distinct impression that Stifel likes to swing for the fences when it recommends a stock. And while sometimes it misses ...

... other times Stifel hits the ball outta the park:

Call me a Fool, but I have a feeling that Friday's Schwab pick is going to be one of those times -- for three reasons:

1. Just a couple of weeks ago, another top-ranked analyst issued a similar upgrade on Schwab. What's more, BMO Capital Markets boasts nearly 2 percentage points better accuracy than does Stifel, as well as a scorecard featuring a winning pick on Schwab competitor TD AMERITRADE (Nasdaq: AMTD). So the stars seem to be aligning behind Schwab.
2. Speaking of stars, did I mention Schwab plays a starring role in our very own Motley Fool Stock Advisor newsletter? It was Fool co-founder David Gardner's first-ever pick for the newsletter, and it's doubled the market's return since then.
3. Schwab is dirt cheap.

Foolish takeaway
Selling for a mere 11 times trailing earnings, and expected by most analysts to grow those profits at nearly 19% per year over the next half decade, Schwab's PEG ratio looks almost too good to be true. And in fact it may be. The broker's last-reported cash flow statement -- for the 12 months ending Dec. 31, 2007 -- showed that GAAP net income came in about 50% higher than free cash flow. However, even by this more conservative metric, the stock looks significantly undervalued.

With two CAPS All-Star analysts in its corner, and two valuation signals blinking bright green, I'm siding with Stifel on this one. Schwab's a winner.

Charles Schwab is a recommendation of Stock Advisor, the Fool's market-beating flagship newsletter service. Check it out free for 30 days.

Fool contributor Rich Smith does not own shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 742 out of more than 100,000 players. The Fool has a disclosure policy.