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 takes a lot of gumption to recommend investing in industry in the midst of a global recession -- so credit the Swiss with having gallons of gumption. Yesterday, they recommended doing just that, as Credit Suisse upped its rating on Dow Chemical (NYSE:DOW).

Right now, a lot of investors are nervous about Dow. The company took on a boatload of debt to buy out Rohm & Haas earlier this year, but according to the analyst, Dow will "generate significant cost cuts/synergies tied to the Rohm acquisition" going forward. What's more, the chemicals magnate is floating more than $1 billion in new stock and debt to help redeem high-dividend preferred shares that made the Rohm deal possible. Between lower costs from the deleted dividends, and "synergies" from trimming fat at Rohm, Credit Suisse expects we'll see Dow surge on even a "modest economic recovery" in the near future.

But is Credit Suisse right?

Let's go to the tape
"Past performance is no guarantee of future success," goes the old investing chestnut. But there's two ways to play that thesis, if you think about it. On the one hand, I'm reluctant to take advice from bankers who've been consistently wrong in the past -- and Credit Suisse has certainly picked its share of losers so far this year:

That said, even the best stock picker can hit a cold streak. Overall, and over the course of the nearly three years that we've been tracking Credit Suisse's performance here on CAPS, the banker has proven itself right more often than wrong. And at least a few of Credit Suisse's recent "play the economic recovery" stocks are starting to turn the corner themselves:

Considering that over the course of its history on CAPS, Credit Suisse has managed to outperform well over 90% of the investors we track, and outperform the S&P 500 itself by 2.5 percentage points per pick, I'm inclined to give this particular banker the benefit of the doubt on its latest recommendation.

Dow: A formula for success
The more so when I crunch the numbers on Credit Suisse's latest pick.

Now, I admit that at first glance the picture doesn't look promising. Dow has no P/E, because it lost money over the past year. In contrast, one thing it does have in abundance is ... debt. About $10.5 billion of the stuff, once you net out cash. Like I said, not a promising start.

Dig a little deeper into Dow, though, and I think you'll find the basis for a bull thesis here. You see, Dow may not have earnings as GAAP defines the concept. But in fact, it generated some $2 billion in free cash flow over the last 12 months. What that tells me is that regardless of the P/E, this stock is selling for less than 10 times its level of annual cash production. Nice.

Even if you add back the net debt to determine the company's enterprise value, you wind up with an enterprise value-to-free cash flow ratio of just shy of 15. So, if Wall Street analysts are correct in positing 16% long-term annual growth for Dow, the price still looks at least somewhat promising.

Foolish takeaway
But what if Credit Suisse is wrong? What if the economic recovery does not appear within the next several months? Why then, Fool, you've still got Dow's 3.4% dividend yield to tide you over until whenever the recovery does come. Looks like a win-win situation to me, Fools. And it looks like another great call by Credit Suisse.