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This Just In: Upgrades and Downgrades

By Rich Smith - Updated Apr 5, 2017 at 6:52PM

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What do you get when two famous analysts upgrade an unknown? Cause for worry.

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 ...
Every so often, you see something on Wall Street and it makes you go "hmm." Take this morning, for example, when a pair of very well-known analysts simultaneously initiated coverage on a single, very un-well-known stock: for-profit Internet educator Grand Canyon Education (NASDAQ:LOPE).

The analysts in question have similar ideas about Grand Canyon. BMO Capital believes the stock will "outperform" the market. Piper Jaffray rates it a "buy," and proceeds to tell us why: According to Piper, Grand Canyon is both a "margin expansion story" and a value proposition.

Basing its assumptions on the growth investor's Holy Grail -- a "1.0x PEG" -- Piper tells us that it expects 35% long-term earnings growth out of Grand Canyon, and believes the stock deserves at least a 35-times-earnings multiple to match. So basically, the analyst sees about 15% upside to the stock between now and the end of next year.

Is that reasonable? Is Piper right in urging us to buy Grand Canyon?

Let's go to the tape
Piper has made some indisputably bright calls in the past ...

Company

Piper Said:

CAPS Says:

Piper's Pick Beating S&P by:

First Solar (NASDAQ:FSLR)

Outperform

**

416 points

Priceline.com (NASDAQ:PCLN)

Outperform

**

97 points

Elan (NYSE:ELN)

Underperform

***

55 points

But according to CAPS, winners like these are more the exception than the rule for Piper. Overall, the banker gets only about 43% of its guesses right, and it ranks near the bottom 20% of investors tracked by CAPS.

Now, Piper cites the example of one of its winners -- Grand Canyon-peer educator Apollo Group (NASDAQ:APOL) -- in support of its buy rating on Grand Canyon. The analyst notes that while the S&P 500 lost 41% of its value this year, Apollo is up 9%. (It might just as easily have pointed to DeVry (NYSE:DV) or ITT Educational (NYSE:ESI), two other education stocks that have handily beaten the market this year.)

But here's the thing: Each of these three proven winners operates at a level of profitability far above the subterranean level of Grand Canyon. Whereas Grand Canyon is generating operating margins of just 8%, DeVry's pulling down nearly twice that level of profit per revenue dollar; Apollo's nearly three times as profitable; and ITT's beefy 31% op-margin is nearly four times Grand Canyon's.

And while Grand Canyon bulls may argue that their company has superior consensus growth expectations (32%-plus) to support its valuation, I can't help but notice that as of today, only two analysts are backing those estimates -- in contrast to the dozen-plus analysts each following Apollo, DeVry, and ITT. Tack on Grand Canyon's attempt to hang a triple-digit P/E on this less-than-certain growth trajectory, and the stock looks like a risky bet indeed.

Foolish takeaway
We're talking education stocks today, so let me sum up my thoughts on today's twin buy ratings with just a couple of Latin words: Caveat emptor.

On Jan. 12, 2009, Fool co-founder David Gardner, Jeff Fischer, and their Motley Fool Pro team will accept new subscribers to their real-money portfolio service. Motley Fool Pro is investing $1 million of the Fool's own money in long and short positions in a range of securities, including common stocks, put and call options, and exchange-traded funds (ETFs). They also incorporate proprietary CAPS "community intelligence" data into their research. To learn more about Motley Fool Pro, and to receive a private invitation to join, simply enter your email address in the box below.

Fool contributor Rich Smith does not own shares of any company named above. Priceline is a recommendation of Stock Advisor. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 558 out of more than 125,000 members. The Fool has a disclosure policy.

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Stocks Mentioned

First Solar, Inc. Stock Quote
First Solar, Inc.
FSLR
$117.97 (2.95%) $3.38
Apollo Education Group, Inc. Stock Quote
Apollo Education Group, Inc.
APOL
Adtalem Global Education Inc. Stock Quote
Adtalem Global Education Inc.
ATGE
$37.57 (-0.45%) $0.17
Booking Holdings Stock Quote
Booking Holdings
BKNG
$2,120.98 (2.77%) $57.22
Elan Corporation Limited Stock Quote
Elan Corporation Limited
ELN
ITT Educational Services Inc. Stock Quote
ITT Educational Services Inc.
ESINQ

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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