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 worst ...
Investors in flash memory specialist SanDisk (Nasdaq: SNDK) received an endorsement from Needham & Co. yesterday, an upgrade to "buy" that helped send their shares soaring 5%. But in early morning trading today, the stock had already begun giving those gains back. Why? Well, one explanation might be: According to its record in CAPS, Needham's a lousy analyst. (No offense.)

Let's go to the tape
I'm tempted to qualify that statement, tone it down a bit. But when I look at this analyst's record, there's just no two ways about it: Needham inhabits the CAPS netherworld of analysts ranked "under 20" (i.e., at least 80% of lay and professional investors outperform it). The analyst gets three picks wrong for every two it gets right, and on average, anything Needham tells you to buy, you can pretty much bet will underperform the S&P 500 by about five points.

Now, there are exceptions to the rule, of course. Based on its accuracy level, you might expect that out of its semiconductor picks, a handful of them will work out:

But you might also expect some underperformers:

And I can't help but notice that the last time Needham endorsed SanDisk, that pick bled red. Backing the stock for three-and-a-half months from June through October of last year, SanDisk underperformed the market by three points. So you'll understand why I have my doubts when Needham tells us to expect "higher estimates and more P/E expansion" as NAND flash memory prices stabilize.

After all, SanDisk already enjoys a pretty lofty multiple -- 32 times trailing earnings, against analyst expectations of just 13% annual profits growth. And while it's true that free cash flow outruns GAAP net earnings at SanDisk, the company's price-to-free cash flow ratio still rides high at more than 21.

Foolish takeaway
With the stock up nearly 50% over the past two months, my gut tells me SanDisk has already had its run. At this point, discretion looks to be the better part of valor, and investors are better off leaving this one be.