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 ...
What do you do when one of the absolute best investors in all of stockdom pans one of the most successful companies in history? Personally, I listen up. And from what I hear, Blue Horseshoe is allergic to coffee.

Today, it's Standpoint Research we find playing the part of "Blue Horseshoe." And Starbucks (NASDAQ:SBUX) is the object of its ire. Citing a stock price "way above" Starbucks' 200- and 50-day moving averages, and valuations of "24X current estimates, 1.6X the market multiple, 1.8X sales and 16X cash flow," Standpoint argues Starbucks is about 20% overvalued today, and advises investors to sell it.

Let's go to the tape
A cursory glance at the analyst's record tells us this is probably good advice. After all, Standpoint ranks among the top 5% of investors we track here on CAPS. Historically, more than 65% of its recommendations have outperformed the market. And yet, take a look at a few of the picks that have helped Standpoint achieve this record:

Not a lot of coffee brewing there. Not a lot of interaction with retail customers, either. Meanwhile, those few times when Standpoint has taken a stand in the bricks-and-mortar retail sector, things haven't worked out so well for this analyst:

And yet, some investors seem to be drinking up Standpoint's pessimism to the very last drop – and selling off Starbucks shares today.

Standpoint's logic gap
But here's the problem (or rather, the prob-lems) as I see it/them. First and foremost, Standpoint takes the fact that Starbucks the stock has been doing really well lately, and twists it around into a "bad thing." Noting that Starbucks currently scores a 91% on the relative strength index, the Standpoint analyst argues: "The market over-reacted to bad news last year ... now we are seeing the opposite ... I see 20% downside in this name with limited upside, the risk-reward is no longer favorable here."

But hold up a sec. Isn't relative strength supposed to be a good thing? Isn't it a key element of the whole "Motley Fool Rule Breaker way of investing?"

Of course it is. And I'm not sure the fact that its stock has gone up fast, and a lot, is necessarily a reason to sell Starbucks today. Because to me, the stock actually looks pretty fairly priced today. Consider: Right now Starbucks carries a 45 trailing P/E and, as Standpoint suggests, a 24 P/E based on its likely "earnings" through year-end. Pricey.

But if you check out the cashflow statement, you'll see that Starbucks is actually a whole lot more profitable than either its trailing or its current GAAP earnings suggest. Free cash flow for the past 12 months amounted to $943 million, or more than twice Starbucks' reported earnings. This gives the stock a multiple to free cash flow of about 18.7. And while that's not screamingly cheap, neither does it look unreasonable given analyst expectations of 16.4% annualized five-year growth at Starbucks.

Foolish takeaway
I have to admit that I'm a bit surprised to see Standpoint panning Starbucks for its success, and for calling a pretty reasonable-looking valuation "20% overvalued." With multiple growth drivers in its pocket – everything from the insane-sounding, but apparently successful Via instant coffee gambit, to international expansion plans, to the recent windfall of free cash flow it's producing –no net debt, and a perfectly acceptable valuation on its stock, I just cannot back up Standpoint on this recommendation.

Far from being a "sell," Starbucks might very well be a "buy."