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 ...
As the market's winning streak came to a screeching halt, one stock drew a hot hand this morning, as UBS upgraded shares of Wynn Resorts (NASDAQ:WYNN). Inspired by UBS' advice to buy the stock, investors have already bid up the shares to the tune of 6%. I hope they're playing with the house's money. Buying Wynn is a losing bet.

Let's go to the tape
Before I tell you why, let's first take a quick look over similar recommendations on UBS' scorecard. Over the past two-years-and-change that we've been tracking it, this Swiss banker has racked up a number of big winners:

Unfortunately, none of these current recommendations has the slightest connection to gaming. In contrast, if you shift your focus to companies connected to the gambling industry -- whether actual casinos, or the people who make their games -- UBS' performance is chilling:

Overall, while it's true that UBS outperforms a lot of investors (about 88% of those we track on CAPS, in fact), its ratings seem little better than guesswork, since UBS gets only about 51% of its picks right.

Why UBS is wrong on Wynn
Sadly for investors who chose to follow UBS' lead this morning, I fear the banker has taken a wrong turn on Wynn. You see, UBS predicates its "buy" thesis on the strength of Wynn's balance sheet, lauding the firm's $1.6 billion cash hoard, and factoring the firm's dilutive 7 million-share issuance into its equation.

Wynn does look relatively strong when viewed side-by-side with MGM (NYSE:MGM) or Las Vegas Sands (NYSE:LVS). But when asked to stand on its own merits, the buy thesis for Wynn quickly collapses. From a valuation perspective, for example, the firm's 16.4 price-to-earnings ratio looks frightfully high for a company that most analysts expect to show declining earnings over the next five years.

The balance sheet strength is also on the wane. As far back as our data provider has information on the company, Wynn has never generated a single cent of honest-to-goodness free cash flow. Instead, this firm has burnt more than $4.1 billion in cash since 2000.

Foolish final thought
Personally, I think the above suffices to explain why you should not invest a dime in Wynn. But I just can't end this column without pointing out that Wynn itself disagrees with UBS. In making its recommendation to buy the company, UBS noted that: "Existing large mass casinos will likely enjoy much better earnings before interest, taxes, depreciation and amortization (EBITDA) growth in 2009 to 2012 than previously expected."

True, but those of you with memories longer than those of the fruit flies at UBS will undoubtedly recall this rebuttal from Steve Wynn himself last year:

We report and talk about these EBITDA numbers with our chest puffed out ... But the public needs to understand that ... the real profitability of these businesses are much, much less than these puffy EBITDA numbers. Interest expense is very large. And depreciation ... believe me, in my 40-year history and in the history of every other gaming company here ... We spend depreciation. It is a real expense. ... We have to pay back the people who lend us the money eventually. It's a much smaller number.

Couldn't have said it better myself. My only regret is that UBS didn't think to say it, too.