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 ...
Shares of electronic entertainment retailer GameStop (NYSE:GME) joined the market rout this morning, helped not one whit by an upgrade to "buy" from CAPS pariah Wedbush Morgan.

But aren't upgrades supposed to help?
In theory, yes. But for an upgrade to be worth listening to, you need three essential elements:

• A logical argument in favor of buying the stock,
• A halfway decent analyst giving voice to it, and ...
• A market that doesn't go bonkers.

Unfortunately, GameStop got none of these today.

The argument
We ain't got one. I've confirmed with two separate sources that Wedbush Morgan -- and not, say, Morgan Joseph, or Morgan Keegan -- is the force behind today's ratings change. But as of this writing, while we know who authored the upgrade, we haven't a clue why. Not a single mainstream news outlet has run a story explaining Wedbush's reasoning on this one.

The analyst
Not that it would necessarily make a difference what Wedbush said. Fact is, this banker's so bad at picking stocks that people might not listen, whatever it said. Since we began tracking it more than two years ago, we've watched Wedbush go down in flames on picks like these:

The analyst ranks just above the bottom 20% of investors as tracked by CAPS, and guesses right less than half the time on its picks. But on the other hand, take a gander at a few of the picks it did call correctly:

In short, when Wedbush does get one right, listening can do wonders for your portfolio. Now, if only there were a way to judge whether this is one of those times...

And now, back to the argument
Lacking any clarity from the analyst, I'm afraid we'll have to work this puzzler ourselves. Fortunately, the math ain't that hard.

Right now, GameStop sells for just 16 times its trailing earnings -- an apparent bargain if the company can live up to Wall Street expectations of nearly 20% annualized growth over the long term. Sure, the company's continuing store buildout, and the capital spending it entails, pulls GameStop's price-to-free cash flow ratio back down to 19.5 -- but to my Foolish eye, that still keeps this stock in bargain territory.

Personally, I think the margin of safety on this one is more than acceptable, and I'm seriously considering putting some of my own money down on GameStop. The way I see it, this one's so cheap that not even an endorsement from Wedbush Morgan is going to scare me away.