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 ...
Suffering Starbucks (NASDAQ:SBUX) shareholders just can't seem to catch a break. The latest indignity: Teutonic megabanker Deutsche Securities downgraded Starbucks shares all the way to "sell." And here's the worst news -- as bad an investor as Deutsche is, according to CAPS -- it's probably right this time.

Let's go to the tape
Why do I call Deutsche "bad"? Because that's what its numbers declare. Over the two-plus years we've been tracking its performance, this banker has proven itself incapable of picking winning stocks even 50% of the time -- a performance that holds true over time. So far this year, Deutsche is once again racking up wins at a rate no better than you'd get from flipping a coin:

And losers accordingly:

And overall, despite boasting one of the biggest names in the industry, Deutsche Bank barely wins a slot in the top half of investors ranked by CAPS.

So, when Deutsche tells us that it thinks Starbucks "must close" more of its stores, that it faces a "new competitive threat" from McDonald's (NYSE:MCD) and "McCafe," and that its comparable store sales and profit margins will continue to deteriorate ... well, I don't disbelieve the analyst necessarily. I'd say the banker has about a coin flip's chance of being right about all this, just as with all its picks.

Choose your poison -- Starbucks is dead money either way
Consider the valuation. Traditionally, Starbucks bulls have pointed to the firm's prodigious earnings -- and the growth thereof -- to support their stock's effervescent valuation. But GAAP earnings totaled just $172 million over the past four quarters -- down some 75% from calendar year 2007. Initially, that makes the stock look very pricey at around 50 times earnings. Fact is, for the first time in a long time, Starbucks actually looks cheaper from a free cash flow point of view -- the valuation approach I used when debunking the Starbucks bull thesis oh-so-many years ago.

But a better method to use when analyzing Starbucks in this economic climate is to compare it with its own past valuations. From 2003-2005, the stock traded consistently at over 40 times earnings (and sometimes above 50 times), pricey to be sure. But look here. A year ago, at the end of March 2008, the P/E was 20, with a price of $17.50. At the end of last month, the price had fallen 48% to $9.15, but the P/E had risen to 48. That means earnings had fallen much further than the price, about 74%. Analysts are only looking for 16% growth in earnings for the next five years, so Starbucks is definitely not expected to be the go-go growth stock it once was. Right now, there's apparently too much "price" in the P/E ratio, which implies that shares are overvalued.

Heads Deutsche wins, tails Starbucks loses
When you get right down to it, all Deutsche's downgrade really does here is put the final nail in the coffin containing Starbucks' bull thesis. If Deutsche is wrong about the store closings, the declining comps, etcetera and so on -- the stock looks overvalued. On the other hand, if Deutsche is right about all these factors that will slow Starbucks' growth going forward, well, Wall Street's expectation of 16% long-term growth looks like an awful stretch.

My Foolish view: Heads, Starbucks is overvalued. Tails, too.

(Hey, but feel free to disagree. If you think Starbucks is a buy, click on over to Motley Fool CAPS and tell us why.)