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 ...
"Consumer-driven recession? Phooey!"

That seems to be the thinking over at Oppenheimer, which started off this trading week with an upgrade for electronics retailer extraordinaire Best Buy (NYSE:BBY). Noting that Best Buy shares have dropped nearly 20% over the past month, Oppenheimer argues that this is too much -- that "concerns [are] largely overblown and ... the market has been far too quick to dismiss the potential benefits for (Best Buy) from Circuit City's demise." Three months after Best Buy's rival disappeared from the bricks-and-mortar marketplace, Oppenheimer says now's the time to capitalize on the potential upside from the inevitable decrease in competition.

But is Oppenheimer right?

Let's go to the tape
Maybe, maybe not. But here's the thing -- if Oppenheimer turns out to be wrong, you probably won't be hurt too badly by following its advice, while if it's right ... this stock could go nuclear.

I'll explain in a moment, but first, let me provide a few numbers to help you see where I'm coming from. Accuracy-wise, Oppenheimer has a simply miserable record in the Specialty Retail segment. Two times out of three, when this analyst hits the up button on a stock, it underperforms instead -- but not by much. Oppenheimer seems to have a real knack for recommending stocks only when they've fallen so low that they can't go much lower:

Moreover, on those (rare) occasions when Oppenheimer is right, just look at how the stocks fly:

As a result, Oppenheimer's overall record doesn't suffer nearly as much as you might expect from its 33% accuracy rating in Specialty Retail. To the contrary, combined with superb performance elsewhere in the market, this analyst overall is still doing quite well, and ranks in the top 15% of investors we track on CAPS.

But will this hold true with Best Buy?
On the one hand, Oppenheimer's major thesis seems spot on. Circuit City has been tripped, leaving Best Buy the biggest and "best" specialized electronics retailer in the nation. While it's true that other retailers are making land grabs in the space -- Wal-Mart, Sears, and Amazon.com for example -- the disappearance of Circuit City and CompUSA from the "bricks" market leaves Best Buy the best pure nationwide play in bricks 'n' clicks electronics retail.

Oppenheimer expects this situation to pay off big for Best Buy in the years to come, and much of Wall Street agrees. Best Buy's trailing earnings don't look so hot right now, having been depressed while the company was struggling to beat the liquidation sales at Circuit City. But most analysts agree that profit will rebound 8% or more next year, pulling the stock's P/E down 25% to just over 11 on a forward-earnings basis. If analysts are right about that, and are also correct about Best Buy achieving five-year growth averaging 13%, then I have to admit that this stock looks cheap.

Foolish takeaway
Now, I maintain my opinion that "forward earnings" are an exercise in optimism -- and often a dangerous one at that. So don't be too surprised if Oppenheimer hews to its usual pattern and turns out to be a bit too early on this upgrade.

Still, the odds on this one do seem to favor Oppenheimer being right in the long run. Best Buy may not be literally the best investment out there, but I certainly don't see a lot of downside to this one.