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 ...
Shareholders in the mellifluously named Potash of Saskatchewan (NYSE:POT) were treated to an early Christmas present yesterday, when Dahlman Rose bowed to the inevitable and removed its sell rating on the stock. (Dahlman's recommendation has lagged the market's returns by 29 percentage points since October, a loss compounded by its similarly bearish bet against Intrepid Potash (NYSE:IPI), and only partly mitigated by an outperform rating on Agrium (NYSE:AGU).)

A top-quartile-ranked i-banker in most things investing, this unforeseen outcome must frustrate Dahlman, so you can understand why the analyst might want to cut its losses today. After all, next door at Broadpoint.Amtech, the potash bulls just raised their earnings targets for Potash -- and for Intepid ... and Agrium ... and Mosaic (NYSE:MOS), too. Broadpoint argues that "as farmers complete their harvest, they appear more inclined to resume buying potash if they can salvage any Fall application." As such, it sees a bumper crop of sales over the next few weeks, and declares that the "worst is over" for fertilizer producers.

But is it?

Let's go to the tape
Dahlman appears to be hedging its bets, not following Broadpoint all the way into "buy" territory, but only expressing agnosticism as it raises its Potash rating to "neutral." And perhaps that's best. After all, while Dahlman has proven proficient in most things mining ...


Dahlman Says


Dahlman's Picks Beating S&P by

Freeport-McMoRan (NYSE:FCX)



169 points

Yamana Gold (NYSE:AUY)



35 points




30 points

... its record heretofore suggests that it might be better off leaving the fertilizer picking to analysts better suited to it.

Digging into Potash
Now, I make no claim to be a fertilizer expert myself, but I do know how to read a financial statement, and I have to tell you, folks -- what I see at Potash frightens me. Fact is, I think Dahlman Rose was right to pan Potash earlier this year, and wrong to throw in the towel just because Mr. Market has disagreed with it for the past few weeks.

Why? Well, for one thing, get a load of this firm's valuation. Potash's P/E sits at a lofty 24, while most analysts predict growth at the firm will average less than 12% over the next five years. And it gets worse, because Potash's cash flow statement looks awfully weak as well. Despite reporting "earnings" in excess of $1.5 billion over the last 12 months, Potash has in fact burned through nearly $500 million worth of free cash flow.

Now things haven't always been this bad for Potash. Over the five-year span from 2004 to 2008, for which we have complete annual data, for example, Potash generated a whopping $4 billion in positive free cash flow. Still, that falls short of the $6.1 billion it reported earning as net income.

Look on the "bright" side
But let's forgive Potash these faults. Let's assume that Broadpoint is right, and happy days will soon be here again, with Potash averaging $800 million in free cash flow, as it has done in recent years. At today's market cap, that means investors are being asked to pay 43 times annual free cash flow for this sub-12% grower. Can anyone honestly tell me they think that's a fair trade?

Seriously. That's not a rhetorical question, folks. I know why I do not like Potash. What I'd really like to know, though, is why other people think this is a fair price to pay? If you've got an opinion, I've got a soapbox where you can shout it from.

Click over to Motley Fool CAPS now, and sound off.

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. 902 out of more than 145,000 members. The Motley Fool has a disclosure policy.