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...
Attention, organic shoppers. Investment banker Friedman, Billings, Ramsey (FBR) turned... well, not bullish exactly, but at least a bit less negative... on natural grocer Whole Foods (NASDAQ:WFMI) this morning. Praising management for putting to bed its running feud with the FTC, and commending the company for cost-cutting, the banker raised its rating on the stock to "market perform."

Hardly a ringing endorsement, but investors who've suffered through more than three years of market cap spoilage seem pleased to hear this vote of confidence from the investment house. The question, however, is: "Should they be?"

Let's go to the tape
Me, I'm not so sure. I mean, consider this banker's record: Over the two-plus years we've been tracking FBR's performance, the analyst has somehow managed to make a coin look prescient by comparison. More than half the time that FBR calls "heads" on a stock, it turns up tails.

And while it's true that FBR has had a "good" run of late, such as these dandies...

...it's also had some mistakes...

...and none of these picks have anything to do with organic shopping -- or even shopping in general.

Nor does FBR do particularly well when it does pick grocers. FBR beat the market with its October 2008 recommendation of Kroger (NYSE:KR) -- in that the stock fell "only" 17 points versus the S&P's 19-point slide, and saw Safeway (NYSE:SWY) drop nine points versus a 10-point market decline on its April 2008 recommendation. Worse still was FBR's September 2008 recommendation to sell Whole Foods itself -- the sell rating that got canceled this morning. That one underperformed the market by a whopping 16 points, as Whole Foods withstood the market's downturn much better than the market itself.

Where to from here?
And now here comes FBR, bloodied but unbowed, and tells us that yes, its pan of Whole Foods didn't beat the market before, but now it thinks the stock looks pretty healthy. I don't buy it.

Why not? Simply put, the numbers don't work for me. Whole Foods has a 21 P/E right now, versus consensus growth expectations of less than 15% for the next five years -- including a decline this year, and about 13% growth in 2010. While I might be willing to place a longish-term bet on the stock if it were at least generating some free cash flow -- it isn't.

Checking the firm's most recent financials, I see that Whole Foods' operations burned through $75 million in cash over the past 12 months, much as it's burned cash in each of the last two fiscal years. Hardly the kind of results you want to see in a debt-laden purveyor of high-priced munchies, stuck smack-dab in the middle of the worst recession in recent memory.

Foolish takeaway
Long story short, I'm not optimistic about FBR's prognosis. The price looks steep, the growth rate respectable (but not extraordinary), and the economic headwinds as stiff as ever. In my view, this means further hard times for Whole Foods.

Of course, that's just my opinion. What's yours?