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…
Did you miss the boat on DryShips' (NASDAQ:DRYS) surge? Don't worry, says Wachovia. There are plenty of other dry bulk shippers in the sea.

I'm paraphrasing, of course. But that does appear to be the import of the three ratings upgrades the investment banker handed out yesterday:

• Diana Shipping (NYSE:DSX)
• Eagle Bulk Shipping (NASDAQ:EGLE)
• Euroseas

Wachovia bumped each of the three up to "outperform," higher even than the "perform" rating that fellow analyst Oppenheimer assigned to DryShips on Monday. After admitting that "fundamentals" in the dry bulking sector are "soft," Wachovia speculated that a lot of the bad news that recently flooded the sector has already been priced into the stocks. As a result, Wachovia thinks that recent price weakness here has created a "solid entry point for short-term oriented investors."

"Solid"... but "short-term"?
Sounds kind of like a trap door. Indeed, Wachovia warned that investors looking for quick profits from these three oversold stocks must "remain nimble" to avoid falling down a bottomless pit. Alas, Wachovia's not exactly the smartest fish in the ocean when it comes to picking winning stocks, at least as tracked by CAPS. The banker gets significantly more of its picks wrong than right, and ranks in the bottom quintile of investors tracked. Attempts at "nimble" stockpicking have not always worked out well for Wachovia:

With yesterday's shipping picks, that "nimble" thing is proving equally tricky. A sufficiently nimble investor, one who jumped into Eagle Bulk Shipping prior to Wachovia blowing the whistle, then jumped out at Tuesday's close, would have booked a tidy 50% profit on the day. Anyone tardier than that, though, is already seeing the stock tumble. (Euroseas and Diana are dropping as well.)

Hope for the non-nimble
But fear not, Fools. Those of us with jobs -- unable or unwilling to spend our lives in front of computer screens, trading "nimbly" into and out of erratic stocks -- can still profit from the depressed prices in the shipping sector. After running the numbers, it looks to me like at least one of Wachovia's new picks offers a compelling valuation.

According to its most recent 6-K filing with the SEC and based on past filings, I estimate that Diana Shipping generated $152.5 million in free cash flow last year, giving the stock an enterprise value-to-free cash flow ratio of just more than 7. (Not quite as cheap as its 4 P/E ratio makes it appear, but still enticingly low.)

Granted, analysts expect the company's profits to flatline, and to remain flat for the next five years. But even if they're right, if Diana can just keep on doing what it's been doing, then six years of generating $150 million (or so) in free cash flow per year should make for a company with $900 million in cash six years from now. I'm oversimplifying the process a bit here, but the way I look at it, that means that a patient investor can expect to get his or her entire investment back in cash, plus own the company for free, in just six years' time.

So yes, Virginia, there is still hope for the non-nimble.