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 worst
What do you do when one of the worst analysts as tracked by CAPS trashes the stock of one of what could be the best businesses in history? Hmm ... do you remember your cartoons? Like the one where the silly technicolor cartoon character would walk down a tree branch, proceed to saw it off -- then realize he's standing on the wrong side of the cut just before "exiting, stage down"?

Yeah, I'm expecting something similar to happen to Benchmark Capital, now that it's clambered out on a limb to downgrade Google (NASDAQ:GOOG).

Let's go to the tape
It would, after all, be appropriate for Benchmark to fail at this latest pick. While the venture capitalist has shown some skill in the oil patch ...

*Originally underperform which it closed, now outperform.

... Benchmark's record in the spheres of e-commerce and the media, however, leaves much to be desired:

Make up your mind, Benchmark
Now I admit, the last time Benchmark hung a rating on Google, it turned out well for the analyst. Recommending that investors grab some Google in April, Benchmark stood by its thesis for all of eight weeks, before changing its mind. But eight weeks' performance does not a record make. Based on Benchmark's longer-term performance, reflected in the tables above, I think you'll understand if I'm a bit skeptical when Benchmark expresses its own skepticism about Google today.

You see, Benchmark warned this morning that despite "economic indicators and online ad trends [that] stabilized in April ... more recent online activity indicates a further pull-back by large advertisers." Predicting we will see "at least a pause" in online ad spending in "June through August," Benchmark suggests investors take a similarly neutral position on Google until things firm up in the ad market.

Buy the numbers
Problem is, by the time things get going in the ad world again, Google shares may well have already priced the news in. Right now, Google shares can be had for about 21 times the $21.25 in profit that Benchmark expects it to earn this year. Further down the road, most analysts predict Google growth of 19% per year over the next five years.

Call me a crazy optimist, but a 21 times forward P/E for 19% growth doesn't seem an unreasonable price to pay for the King of the Internet. What's more, Google's P/E really doesn't give this company credit for two facts:

• First, Google generates 50% more free cash than can be reported net income under GAAP. Free cash flow over the last 12 months has totaled $6.5 billion.
• Second, Google carries $17.8 billion in cash, equivalents, and short-term investments on its balance sheet, against no debt whatsoever.

Factor these two numbers into the equation, and Google's actually selling for something more like a 19 enterprise value-to-free cash flow ratio. It may not be the cheapest stock I've ever seen, but then again ...

Foolish takeaway
... does the phrase: "Great company, good price" mean anything to you?