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 ...
Like everything else in the investing universe yesterday, shares of chip kings Intel (NASDAQ:INTC), Advanced Micro Devices (NYSE:AMD), and Texas Instruments (NYSE:TXN) went tumbling down yesterday. Helping matters not one bit was a trio of new ratings on the Big Three, as Wall Street analyst Collins Stewart weighed in on the sector.

Not that Collins Stewart had nothing nice to say. In fact, while appending only a "hold" rating to TI, the analyst graced both Intel and AMD with brand-spanking-new "buy" ratings.

Collins argues that Intel should enjoy high-single-digit revenue growth over the long term. Combined with operating margins potentially surpassing the 30% level, Collins expects to see strong profits growth at the company. Note that Intel right now still falls short of earning even 26% margins on its chips, so this is a guess at long-term improvement at the company.

It's a guess, furthermore, supported by Collins' "endorsement" of AMD. To me, this one feels more like a short-term play. Collins is looking for 7% sequential revenue growth and perhaps some gains in market share as NVIDIA (NASDAQ:NVDA) continues working through its well-publicized packaging problems. Longer-term, though, Collins sees AMD "losing share to Intel in the core processor business."

And this merits a "buy" rating?
In the crazy, madcap world of analyst thinking, apparently it does. But beware of following Collins down this path of short-term thinking -- others who've done so have not been well rewarded. According to CAPS, fewer than 42% of Collins' stock recommendations work out for investors. The analyst ranks in the 59th percentile of CAPS members, hurt badly by such otherwise promising picks as:

Foolish takeaway
Buying into money-losing AMD on advice that includes a likely loss of market share to one rival, not to mention gains in share in another market that depend greatly on having another rival make  mistakes, doesn't seem particularly Foolish to me.

In contrast, Collins Stewart's suggestion that Intel looks interesting appears more grounded in logic. Most analysts expect Intel to achieve close to 14% long-term profits growth. Meanwhile, the stock sells for just less than 13 times its trailing free cash flow. Not exactly a huge margin of safety there, I'll grant you -- but the value proposition at Intel is at least starting to look interesting.

And one final thought: If you're feeling particularly contrarian today, TI is still the stock I like best in this sector. Sure, Collins gave it only a "hold" rating yesterday. But trading for less than 9 times free cash flow, and expected to grow in excess of 14% per year over the next half-decade, TI remains your best bet for getting a piece of the chip space for a dirt-cheap price.