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 ...
Yesterday, we looked at Oppenheimer's recent Intel (NASDAQ:INTC) upgrade -- and found little logic in it. Equal advertising laws require (not really, but work with me here) that today we give equal time to Intel rival AMD (NYSE:AMD), and the downgrade it suffered at the hands of another analyst, FBR Capital.

As you'll recall, Oppenheimer's bull thesis in Intel's defense was simple: Microsoft's (NASDAQ:MSFT) due out with a new operating system any day now. The recession is ... if not yet over, at least not as bad as it once was. And in this cyclical industry, companies are bound to start buying new computer hardware sooner or later, so advantage -- Intel.

Are you with me so far? Good. Because as simple and clear cut (and in my opinion, wrong) as Oppenheimer's upgrade was for Intel, FBR's downgrade is wordy and opaque in downgrading AMD, but at least it's right. Recounting the details of its recent Taiwan Technology Tour at length (the lunch buffet was to die for, but the hotel rooms were a bit cramped), FBR explains why it has recently limited its exposure to "the PC chip supply chain." Specifically, FBR fears that:

• "the October launch of Windows 7 has motivated some finished goods stockpiling;"
• "component tightness ... caused suppliers to build early to guard against shortages"
• An upcoming week-long holiday in China may have convinced some PC manufacturers to build comps ahead of schedule.

FBR says this all adds up to one inescapable conclusion: PCs that should have been built in the fourth quarter of this year were instead shifted forward and built in Q3. Thus, the ramp-up in hardware demand that others are seeing could in fact be an illusion. This cautious interpretation of events convinced FBR to pull its previous buy rating on AMD. Was that the right call?

Let's go to the tape
I believe it was -- but not for the reason you might think; not because FBR is some kind of genius analyst, capable of seeing patterns where others do not. To the contrary -- FBR is actually a pretty awful semiconductor analyst. While it has had the odd success here and there ...

... its losers outnumber its winners:

And in fact, it's even worse than the tables above suggest. Over the course of its last three years picking semi stocks, 60% majority of FBR's recommendations in this industry underperformed the broader S&P 500. Combined, the analyst's semi-skilled recommendations have added up to more than 125 percentage points worth of losses to the market.

Right for the wrong reasons
So why am I backing FBR's play on AMD? Simple: Because it's right to downgrade the stock.

If I've got a bone to pick with FBR, it's that the analyst didn't go far enough, downgrading the stock only to "market perform." FBR tells us it doesn't want to get "overly bearish on the PC space given improving global demand and unknown holiday sell-through trends."

That's a mistake, Fools.

FBR says "valuations remain reasonably attractive" at AMD, and that the company's "cash flow generation is improving." But the numbers tell a different story. Over the last five years, AMD has averaged $850 million in negative free cash flow per year. Over the last 12 months, the company burned through $1.4 billion in cash.

Foolish takeaway
I don't know about you, but to me, that's not much of an improvement. Burdened with $2.2 billion in net debt, and having little prospects of paying it down absent any free cash flows from its business, I see little hope that AMD will do anything other than diminish shareholder value for the foreseeable future. And in my book, Fools, that's not reason to "hold" the stock.

But it's an excellent reason to sell.