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 ...
As trading wound down for the rest of the market Friday, Oppenheimer slipped in one last rating before the bell tolled. Predicting that hardware upgrades, low inventory levels and a reviving corporate sector will spark "a return to growth in the PC market in 2010," Oppenheimer upgraded Intel (NASDAQ:INTC) to outperform.

Oppenheimer argues that Intel's expansion in the computer servers market in particular could "outpace rivals ... leading to market-share gains." And with the stock having already fallen 6% over the course of September, the analyst thinks now's the time to buy -- before business picks back up, before the stock surges. But is it right?

Let's go to the tape
It's hard to say. On the one hand, Oppenheimer's record in semiconductor stocks appears far from perfect. The 26 recommendations it's made in this sector over the last three years have split right down the middle -- half outperforming the market as promised, and half lagging it.

But what's really striking to me is Oppenheimer's skill at picking stocks capable of running far to the upside ...

...while limiting its risk to the downside:

While it's true that, technically, Oppenheimer only has about 50% accuracy in semi-stocks, the fact remains that its sizeable outperformance among winners has this analyst simply crushing the market by a combined 200 percentage points.

Result: Oppenheimer's skill in this sector is key to the fact that the analyst ranks near the top 10% of investors we track on CAPS.

And yet ...
So why is it that, in the face of Oppenheimer's demonstrated success, I remain unconvinced about Intel? The reason is this: I think Oppenheimer's broken from its pattern by going out on a limb and recommending a stock that's now so overpriced that it has significant downside risk.

Consider: Intel currently sells for a nosebleed-inducing P/E ratio of 43, and it's not just the P/E that worries me. Even judged on its cash-profitability, Intel is no bargain. Free cash flow over the last 12 months comes to $4 billion, and with a market cap about $106 billion, this stock still costs more than 26 times free cash flow. With most analysts predicting sub-10% growth at Intel over the next five years, the stock looks richly valued.

Foolish takeaway
Let me be clear here: I do not disagree with Oppenheimer's macro thesis. The impending arrival of Microsoft's new operating system will unleash a surge in corporate spending (consumer spending too -- personally, I've been holding off on buying a new computer for nearly a year in order to avoid getting stuck with Vista.)

The problem is that Intel's stock has already run up nearly 60% from its February lows. Next year's good news, and the optimism surrounding it, has already been priced into the stock. Viewed today, Intel costs too much and is ready to fall.

(Note to AMD (NYSE:AMD) shareholders. Don't gloat yet. Your stock got downgraded just this morning. I'll be taking a good hard look at what FBR had to say about it, though, and will be back with a report tomorrow.)