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 track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

And speaking of the best...
It's a situation calculated to test the patience of the most saintly investor: You own a stock. You hear that some analyst somewhere likes it, and the stock goes up -- but no one seems to know exactly why. Do you hold on and enjoy the ride, or take the profits and run?

In a nutshell, this is the dilemma that GeoEye (NASDAQ:GEOY) shareholders face today. We know Canaccord Adams initiated coverage on this little Motley Fool Rule Breakers-approved satellite shop. We know the stock's blasting into orbit in response -- up nearly 8% as of this writing. But we haven't a clue whether the surge is justified, because not a single major media outlet has reported (or perhaps Canaccord hasn't even revealed) the reason for its optimism.

What we do know
Here at Motley Fool CAPS, we can't do much to improve the disclosure practices of the major stock houses -- but we can at least tell you how well their unsupported guesses have fared in the past. In Canaccord's case, for example, we've watched this analyst rack up a record of decent performance over the past two years. Notable winners have included:

Problem is, Canaccord gets even more picks wrong than it does right. Continuing to focus on firms that use the kinds of satellite photos that GeoEye purveys, we find Canaccord advising:

Overall, it adds up to a record of something less than 50% accuracy on Canaccord's picks -- and a somewhat less-than-impressed Foolish writer. Generally speaking, this analyst's guesses fare slightly worse than a coin toss. Combine that with the total lack of detail on today's recommendation, and I cannot help but conclude that -- while we certainly enjoy the stock price bump that Canaccord's rating has gifted us, we have little reason to believe it's warranted.

In short, we're on our own, Fools.

Due diligence
Unable to trust Canaccord's advice on its face, we're going to have to decide what to do with GeoEye based on publicly available knowledge. So what do we know about the stock itself?

Beginning with the basics, we know that GeoEye sells for something less than a 19 P/E today, despite consensus analyst expectations of 20% long-term growth.

Look a little deeper, though, and you'll see it's not quite as simple as that. GeoEye's cash-flow statement, for example, shows that far from generating real free cash flow, the firm is burning cash at a prodigious pace -- nearly $130 million last year alone. Not only is that not a great situation to be in, it's also not sustainable. Right now, the firm carries nearly $250 million in long-term debt, against barely $110 million in cash and equivalents. So unless GeoEye starts making some green -- and soon -- the company could be looking at a cash crunch within the year.

Foolish takeaway
This prospect probably explains, too, the high short interest in the stock -- nearly 17% at last report. Which, in turn, may help to explain the scale of the stock's gain in response to a single analyst's say-so. Looks to me like some shorts just got squeezed.

My advice? GeoEye's in a tenuous position right now -- but so are the shorts. Any more good news, and we'll see additional sharp spikes in stock price. But is there reason to be nervous? You bet there is.