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...
Investment banker Oppenheimer helped make Corning's (NYSE:GLW) ticker glow green yesterday, when it initiated coverage of the stock at "outperform." However, Oppenheimer simultaneously gave Universal Display and AU Optronics (NYSE:AUO) mere "perform" ratings.

Relative to those two, at least, Oppenheimer thinks Corning is the best bet. If only we knew why Oppenheimer thinks so! None of the major news outlets reported the reasoning behind yesterday's ratings. Even StreetInsider.com drew a blank, announcing the ratings, but providing no rationale.

Trust us...
As an individual investor myself, I know there are few situations more frustrating than the one Corning investors find themselves in today. You're being asked to take the analyst on faith -- to buy Corning without knowing why it might be a good idea.

...because we know what we're doing
Moreover, this is just an "initiation" of coverage on a stock that Oppenheimer has never covered before (at least, not within the past two years). It logically follows that Oppenheimer has no track record on Corning to reassure us that when it says "strong buy," "tentative sell," or "aggressive hold," it really does know what it's doing.

That said, Oppenheimer does have a track record in certain downstream stocks that directly or indirectly use products like those that Corning manufactures. These businesses include AT&T (NYSE:T), which uses fiber optics; Motorola (NYSE:MOT), which installs LCD glass in its cellphones; and Newell Rubbermaid (NYSE:NWL), which licenses Corning's products. The better Oppenheimer's grasp on the downstream picture, the more reliable its ratings upstream should be, right? Digging through the banker's stats on CAPS, here's what I've found:

It seems that in these downstream industries, Oppenheimer gets plenty of picks right -- but plenty wrong, too. If you broaden the picture to examine Oppenheimer's overall record, you'll find the same pattern. In nearly 350 ratings tracked by CAPS over the past two years, Oppenheimer has guessed right less than 49% of the time, ranking the analyst no higher than the 70th percentile of investors we track on CAPS.

Cross-examining a Corning pick
At first glance, you might be inclined to forgive Oppenheimer for these numbers. I mean, when you get right down to it, Corning looks like enough of a no-brainer that even a mediocre analyst like Oppenheimer couldn't blow this call. The stock sells for a 3 P/E, for heaven's sake!

But take a look at Corning's cash flow statement, and you'll see why I actually believe that Oppenheimer's wrong about Corning. True, Corning reported nearly $5.3 billion in profit last year, but barely $207 million of that amount was backed up by honest-to-goodness free cash flow. Compare the company's enterprise value to its ability to generate free cash flow, and you'll find the stock trading for a whopping multiple of 77. Quite a difference.

Worse, as I explained last week, Corning isn't promising to maintain even this anemic level of cash generation in the current year. All Corning's chief financial officer commits to these days is the "goal" of being "free cash flow positive for the year." Sure, that could mean more than the $207 million in free cash flow generated last year. It could also mean a whole lot less.

Foolish takeaway
Way back in December 2005, when I first interviewed the CEO, Corning's stock was trading for $20. The firm's inability to generate significant free cash flow made me pessimistic back then, and I've remained so ever since -- as the stock rocketed to nearly $30, then plunged to its current level of $10 and change.

Unless and until Oppenheimer voices a reasoned argument for why it's right this time, I'm sticking to my guns, and not sinking any of my pennies into Corning stock.