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 ...
See if you can figure this one out, Fools. As the trading week warmed up yesterday, Pali Research:

  • Lowered its 2009 and 2010 earnings estimates for Nasdaq OMX (NASDAQ:NDAQ).
  • Warned that profits will come in below Wall Street's consensus estimates.
  • And voiced worries "that NDAQ may look to pursue M&A in order to further diversify its business mix."

At which point Pali did the only logical thing. It upgraded the stock.

Huh?
Yes, you read that right. Pali removed its sell rating on Nasdaq yesterday, and upgraded the shares to "neutral," saying it sees "potential upside to 2Q." Which doesn't make a whole lot of sense, it's true. But then again ... Pali doesn't have a whole lot of experience in this sphere of stock picking either.

To the contrary, Pali is better known as a recommender of telecom stocks:

Stock

Pali Says:

CAPS says:

Pali's Picks Lagging S&P By:

Sprint Nextel (NYSE:S)

Outperform

**

24 points

AT&T (NYSE:T)

Underperform

****

1 point

Verizon (NYSE:VZ)

Outperform

****

2 point

(Which is not quite the same thing as being "known as a picker of better telecom stocks.") So if its upgrade of Nasdaq doesn't make a whole lot of sense today, that's only to be expected. Pali's fumbling in the dark here.

That said, in Pali's defense, it did notice one bit of trivia that seems more supportive of upgrading Nasdaq. To wit: "With shares trading at 11.9x/10.6x our 09/10 EPS estimates, we believe NDAQ is fairly valued at current levels, particularly with other exchanges trading at an average of 16.6x 2010E."

This, at least, makes some sense. CME Group (NYSE:CME) sells for 18.2 times next year's earnings. IntercontinentalExchange (NYSE:ICE) shares fetch 17.8 times next year's earnings. And even NYSE Euronext (NYSE:NYX) carries a slight premium to Nasdaq's valuation, trading at a forward P/E of 11.9. It's also worth pointing out that Wall Street expects to see faster growth out of Nasdaq than at any of its peers -- upwards of 14% annually over the next five years.

And yet, flip this argument around, and I also see why investors might think Nasdaq's rivals deserve their higher valuations. For one thing, every one of these companies boasts a higher operating profit margin than does Nasdaq. They all carry less onerous debt loads than Nasdaq as well.

Last but not least, with an enterprise value verging on $6.2 billion, but free cash flow that tips the scales 9% lighter than its reported net income (free cash flow for the last 12 months came to $267 million), Nasdaq looks overvalued to me.

Foolish takeaway
When you get right down to it, I actually agree with today's featured analyst. This stock may well be the least overpriced stock on this list of four. But it's still too expensive. And Pali's still wrong to be upgrading an overpriced stock. Pali's change of heart notwithstanding, Nasdaq's still a sell.

Fool contributor Rich Smith does not own shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 776 out of more than 135,000 members.

NYSE Euronext is a Motley Fool Rule Breakers recommendation. Nasdaq OMX Group and Sprint Nextel are Motley Fool Inside Value picks.