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 posed this puzzler: "What do you do when one of the absolute best investors in all of stock-dom" tells you Starbucks (NASDAQ:SBUX) is overpriced? (I argued that if the stock looks fairly valued to you, ignore the misgivings and stick to your guns.) Well, today we're going to switch that question around a bit. Today, we take one of Wall Street's best analysts, examine its bullish stance on NVIDIA (NASDAQ:NVDA) and Marvell Technology (NASDAQ:MRVL) -- and tell you why you should stay away.

As markets rush headlong into the New Year's festivities, and a brief kibosh on trading, Wall Street banker Kaufman Brothers found time to squeeze in a couple last-minute upgrades this morning. Arguing that both NVIDIA and Marvell will grow as the market for personal computers revives, Kaufman believes each also has additional tricks up its sleeve to boost earnings. NVIDIA will ride a wave of growing demand for dedicated computer graphics chips; while Marvell will benefit from its moves into "ARM-based processors." But while Kaufman's reasons may differ, its conclusion on each stock is identical: Buy.

Let's go to the tape
Based on the analyst's reputation in tech, you might be inclined to agree. After all, Kaufman has an enviable record on semiconductor stocks, scoring 56% accuracy on picks such as:

That's even better than Kaufman's overall record of 55% accuracy on its picks. It's an achievement, too, that's lifted Kaufman to a rank just shy of the top 5% in CAPS -- nearly as high as that of Standpoint, profiled yesterday. (But on the other hand, I notice that the last time Kaufman laid a bet on NVIDIA (in October 2007), this recommendation wound up underperforming the S&P 500 by 44 percentage points.)

That gaffe notwithstanding, I have to admit that I'm intrigued by Kaufman's latest picks. There's a lot to like about NVIDIA and Marvell. Both companies boast:

• Impressive cash reserves amassed already: $1.6 billion for NVIDIA, $1.5 billion for Marvell.
• Strong free cash flow coming in the door despite a brutal semiconductor slowdown: NVIDIA generated $300 million in the last 12 months, and Marvell $610 million.
• Last but not least, rapid growth rates: Analysts expect to see 13.4% annual growth out of NVIDIA over the next five years, and a brisk 16.1% pace at Marvell.

Can Kaufman count?
Still, with NVIDIA selling for 34 times trailing free cash flow, the stock looks awfully pricey to this Fool. Meanwhile Marvell, with its more reasonable-sounding 21-multiple to cash flow, seems at best fairly valued (and at worse, a bit overpriced in its own right.)

And while it's true that the twin impetuses (impeti?) of the Microsoft (NASDAQ:MSFT) Windows 7 release and a general finding-of-footing for the economy could boost both companies' fortunes, to me, 13% to 16% growth seems plenty optimistic already. I wouldn't get greedy and bet on much more growth than this.

Foolish takeaway
Do NVIDIA and Marvell have bright futures ahead of them? I've little doubt they do. Problem is, the prices on both stocks today suggest that such future success has already been "priced in" -- with the result that there is precious little additional profit to be had here.

My advice: Stay away from both of 'em. There are better bargains to be had.