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 ...
Monday brought with it the start of another trading week, and also a new initiation of coverage from Citigroup. Yesterday, the megabanker began covering Western Union (NYSE:WU) with a "buy" recommendation, and the shares dutifully responded by rising.

But for the life of me, I don't know why. You see, while Briefing.com reported Citi's new stock, and Streetinsider.com confirms that the rating happened ... nobody seems to know why Citi is studying Western Union -- and Citi ain't tellin'. Not a single major media outlet has any details on the initiation.

Speak up, Citi!
There are few situations more frustrating to the individual investor than the one we face today. Citi tells us to buy Western Union, yet won't tell us why. But while we're unable to confirm what Citi thinks, here at CAPS we can at least clue you in to how well it thinks.

And that's the good news. Nearly three years of diligent data-crunching here at the Fool reveal that there's good reason to heed Citi's advice on Western Union. Why? For one thing, because Citi ranks among the very best investors we track at CAPS. It gets most of its stock picks right and outperforms more than 85% of all CAPS members in the process.

Sure, no one's perfect. But while a review of Citi's performance on past financial picks finds Citi making a few losing bets ...

... it also shows that Citi's winners generally outweigh its losers:

What's more, the last time Citi recommended buying Western Union, the stock went on to beat the S&P 500's performance by more than 24 percentage points. I know: "Past performance is no guarantee of yadda, yadda, yadda ... " But if you know a better indicator of stock-picking prowess than how an analyst has performed in the past, I'd like to hear it.

How about this one?
Hold up a sec -- come to think of it, I do know a pretty good indicator of whether a stock will outperform: valuation. Buy a stock for a low enough price, and chances are pretty good you'll be rewarded in the end. And from where I sit, Western Union does offer a pretty nice price.

Sure, it doesn't look that way immediately. Right now, Western Union is selling for a 14.4 P/E, which doesn't look particularly cheap in light of analyst predictions of sub-12% long-term growth. Why, lacking anything more than a token dividend to recommend it, you might even call the stock expensive.

That would be a mistake. Western Union's reported earnings mayn't impress. But the great thing about this business model is that there's not a whole lot of capital expense involved in moving money from hither to yon. As a result, this company spits out a whole lot more cash than it gets to report right away as net earnings -- about 35% more over the past four quarters.

Foolish takeaway
As a result, while some analysts might look at Western Union and see a pricey 14 P/E stock, I look at it and see a company selling for just 10.5 times its annual free cash flow. To me, that's an entirely reasonable price to pay for a projected 11.6% grower.

Maybe even cheap.