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 ...
Oh, I know I'm going to regret this in the morning (or perhaps many mornings hence). But after seeing Canaccord Adams upgrade Google (NASDAQ:GOOG) yesterday, I ran a quick check on the company's numbers and, well, yes. I agree. Google is a buy.

Why so glum, chum?
Because by every indication, Canaccord just isn't that great of an analyst -- and I'm not at all comfortable standing next to them on the "buy side" of the Google trade. According to our records on CAPS, you see, most of the time Canaccord rates a stock, it guesses wrong. And despite being a name player on Wall Street, this banker barely breaks into the top half of investors we track on CAPS -- precious few of whom own their own investment banks.

Now, don't get me wrong. Canaccord's not all bad. It does pick the occasional tech winner -- recommendations such as IBM (NYSE:IBM) and Amazon.com, for instance, are both thrashing the market's returns by 40 points and more:

That said, when it comes to the Internet advertising market in which Google operates, I fear Canaccord's record on certain other stocks will prove more instructive. Specifically:

Which, I think you'll agree, put this analyst's insight in question when it opines on Google: "Estimates for search and CPC growth expectations in 2009 have been lowered to sufficient levels," and that furthermore, "deteriorating conditions in search trends have started to improve in late March." CPC refers to "cost-per-click" -- or more broadly, Google's pricing power when charging for its services. In short, Canaccord thinks that expectations for Google are low enough to justify a purchase.

Buy the numbers
So why am I siding with Canaccord despite its clear lack of prescience in this arena? Basically, because Google's numbers tell me I must. With $5.5 billion in trailing free cash flow -- 30% more than the company gets to report as "net earnings" under GAAP -- Google sells for the entirely reasonable enterprise-value-to-free-cash-flow valuation (EV/FCF) of just over 17. For the dominant name in Internet search, a company that most analysts believe will grow earnings at nearly 19% per year over the next half decade, and a company sitting on a massive $15.8 billion trunk o' treasure (cash and short-term investments), Google looks like the prototypical "great company at a good price."

That said ...
Not everyone wants to pay up for quality. I get that. If you're more of the "good company at a great price" bent, and perhaps leery of paying what Canaccord considers a fair price ... well, considering the analyst's record, I can understand that, too.

In that case, you might want to consider two other Canaccord recs that it made right alongside Google -- each of which offers a big enough margin of safety that it should, to my mind, offset the risk inherent in following Canaccord's questionable advice. I'm talking here about IAC (NASDAQ:IACI) and ValueClick (NASDAQ:VCLK). According to Canaccord, they're both just as much "buys" as Google -- and my numbers tell me they're in fact quite a bit more so.

IAC stock at today's price, for example, fetches an eye-popping 1.6 times enterprise value to free cash flow. Given consensus estimates of 18% growth for the next five years, and a market cap that's made up almost entirely of cash, this one looks like a much surer bet than Google. Likewise ValueClick. Offering an EV/FCF ratio of 5 and expected to grow at 13% per year for five years, that one's about as close to buying $1 bills for 50 cents as you're likely to find.

Foolish takeaway
Long story short: I like Google a lot. I like IAC and ValueClick even more.