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...
Analysts worthy of the "best" moniker are rarer than orange groves in Ontario these days. But if you look real hard, you can still find a couple of decent stock shops here and there. One of the best still standing (as ranked by CAPS) is Janney Montgomery Scott, a little Philadelphian investment banker and subsidiary of the venerable Penn Mutual Life Insurance Co.

And good (?) news, Fools: Janney just initiated coverage on a couple of Motley Fool Stock Advisor's favorite companies. Let's see what they have to say:

First up, Electronic Arts (NASDAQ:ERTS). Janney has mixed views on the world's second-biggest e-games maker. On the one hand, Janney thinks that "the installed base of current gen systems ... provides a solid 2-3 year outlook. We expect 5-10% software growth in 2009 driven by a ramp in hardware base and potential for hardware price cuts ... and there continues to be strong demand for Nintendo products (Wii/DS), which are broadening the market." On the other, Janney is looking in the immediate future for "tough [year-over-year] comps ... weaker catalog sales" and flat revenue in fiscal 2010. Hence, the analyst is taking a neutral stance on the shares for the time being.

Janney seems considerably more optimistic about EA rival Activision Blizzard (NASDAQ:ATVI), however. Despite citing the same numbers as it used in its "neutral" call on EA, Janney terms Activision "the best positioned to grow revenues in 2009," and says its core publishing business is "undervalued."

Now that we know what Janney has to say, let's see whether any of it is worth listening to.

Let's go to the tape
We've been tracking Janney's picks for well over two years now on CAPS. Unfortunately, the news here is as mixed as Janney's views on the gamers. On the one hand, the analyst boasts some impressive headline stats. With its average pick outperforming the S&P 500 by better than two percentage points, this analyst ranks near the top 10% of stock pickers tracked by CAPS. The analyst seems especially skilled at picking biotech winners...

...which, sadly, neither Activision nor EA is. The gamers have much more in common with Janney's few picks in the entertainment sector, where the analyst's record so far is as disappointing as it is short:

Looks can be deceiving
Moreover, I can't help but notice that without those biotech names on its scorecard, Janney's record would look a whole lot weaker. As it is, the analyst is only getting about 54% of its picks right -- hardly inspirational.

Nor am I inspired by the picks themselves. I mean, take Electronic Arts, for example. The company is losing money and generating precious little free cash flow -- just $109 million over the past 12 months -- yet sports a market cap north of $5 billion. Maybe it's worth a "hold," but personally, I'd be nervous owning that one.

As for Activision, I'm sorry to say that this pick doesn't look much better. Activision's P/E is in the triple digits right now -- scary. Even on a price-to-free-cash-flow basis, at just shy of 60 it looks questionable. Either way, I don't see the price as justified, given analysts' consensus growth expectations of 16% per year over the next five years.

Foolish takeaway
Janney Montgomery Scott is a fine analyst when it comes to biotechs, but even the best analysts should stick to what they're good at. With limited experience in entertainment companies, and a record there that's anemic at best, it seems to me that gaming isn't Janney's forte. Its overly optimistic ratings on overvalued stocks like Electronic Arts and Activision just confirm my suspicions.

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