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 ...
It's been a busy week for Force Protection (NASDAQ:FRPT), which has already received two analyst upgrades in as many days (and the week ain't over yet). The first upgrade arrived Monday, when Collins Stewart declared the stock a "buy." No sooner had it done so, than Tuesday arrived and Dougherty & Co. clambered aboard the Cougar, likewise slapping a "buy" rating on its armor-plated hide.

Now here's the bad news: It's entirely possible that neither of these analytical musings is worth the virtual paper it's printed on.

Let's go to the tape
Take Collins Stewart, for example. According to our tracking in CAPS, more than three times out of five, anything CS tells you will "beat the market" will actually lag it -- and vice versa. On average, CS' best guesses tend to underperform the S&P 500 by nearly a percentage point apiece, with the result that this analyst places in only the second quintile of investors tracked by CAPS. A few examples of its work:

Hard as it is to believe, Dougherty does even worse. With accuracy hovering around 32% and a record of lagging the S&P 500 by nearly 11 percentage points per pick, Dougherty manages to underperform some 80% of the investors tracked by CAPS, thanks to picks like:

So what at first looks like a plus -- Dougherty has some experience with companies operating in the defense sphere -- is actually a minus. Dougherty may rate the companies, but it seems to understand them not at all (unlike chicken wings).

You've met the raters, now rate the ratings
But before we consign these analysts to their fates, let's at least give their arguments a quick logic test. So far as I can tell, Dougherty issued a bare upgrade, with no supporting facts -- at least, none that (a) it made public or (b) the news services have deemed worthy of reprinting. Collins Stewart, however, did explain its buy rating on Force. Here's what it had to say:

[F]or 2009 ... we are projecting sustainment revenue of $205 million... However, the company is pursuing a number of opportunities that could lead to revenues well in excess of that amount... The shares are cheap, but so are a lot of stocks...We believe there is upside to our base estimates.

As it so happens, I discussed a few of these "opportunities" in yesterday's column on Force's earnings release. Like CS, I believe that Force's "sustainment revenue" -- i.e. the revenue it takes in for servicing, repairing, and training the crews operating its Cougar and Buffalo MRAPs (mine-resistant, ambush-protected vehicles) in the field -- already justify the company's $195 million market cap.

Foolish takeaway
In my opinion, any halfway decent defense contractor gets about a one-times-sales valuation from Mr. Market. If CS is right with its $205 million projection (and Monday's $72 million in quarterly sustainment revenue suggests it's within a very conservative ballpark), then I agree that anything additional to those sustainment revenues should translate into upside for Force Protection's stock price.

It makes little difference whether that upside comes in the form of:

• Belated sales of the firm's Cheetah light armored vehicle (better named the "White Elephant" based on its sales "success" to date).
• Further success in selling Cougar MRAPs overseas (which has become more difficult now that it faces General Dynamics (NYSE:GD) as a competitor).
• A breakthrough in sales arising from new research into more mobile Cougars, and "cargo" Cougars.

Based on today's stock price, any success whatsoever should suffice to make Force Protection a "buy." That's why I'm risking my own reputation today by agreeing with these two subpar analysts, and why I hold my own Force Protection shares still.