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 ...
Four of these reputedly best-and-brightest caught Brocade Communications (Nasdaq: BRCD) in a withering crossfire of downgrades yesterday. Horrified at the company's performance in the 2010 fiscal first quarter (sales up only 25%?! Disaster!), each of UBS, Jefferies, Stifel Nicolaus, and RBC Capital Markets lashed out at the company, pulled their "buy" ratings, and downgraded the stock to various flavors of "hold."

And you know what? They're right.

Let's go to the tape
Before I dig into the nitty-gritty of Brocade's numbers, let's take a moment to consider the reputations of the analysts who yesterday inveighed against Brocade:

Of the four, Stifel's the best by far, outperforming 97% of the investors we track on CAPS. But its partners in yesterday's round of Brocade-bashing are no slouches either. Each of RBC, UBS, and Jefferies (in that order) place well within the elite tier of stockpickers that we term the "All-Stars" on CAPS. Collectively, they've uncovered unexpected winners such as:

  • Ford (NYSE: F) -- picked by UBS one year ago for a 330% gain
  • Rackspace -- Stifel's March 2009 claim to fame -- a 264% gainer
  • PotashCorp (NYSE: POT) -- a longtime RBC fave, and a 50% gainer for the analyst
  • and VanceInfo Tech -- a clean triple for Jefferies

Each of these bankers outperforms four out of five investors surveyed -- so in short, if you're going to take advice from Wall Street, you could do a lot worse than by listening to these four analysts -- the Wall Street elite.

Now, on to the point of why these four worthies are so down on Brocade this week.

Brocade blows up
When Brocade bought Foundry Networks back in 2008, it was with the aim of sparking a gold rush of profits from the booming Ethernet business. Well, business is booming all right. Problem is, it's booming for everybody but Brocade. Rivals Cisco Systems (Nasdaq: CSCO) and Juniper Networks (Nasdaq: JNPR) are enjoying "gangbusters" growth, Brocade, in contrast, saw its Ethernet revenues drop 26% compared with the previous quarter. Meanwhile, partnerships with IBM (NYSE: IBM) and Dell (Nasdaq: DELL) aren't panning out as planned. Put it all together, and Brocade now expects to earn only about $0.56 per share this year, several cents fewer than previously predicted, and fully 7% below Wall Street's expectations.

That's bad news, to be sure. But is it enough to justify the 23% drop this stock endured yesterday?

One word: Yes
The answer is yes, and for one simple reason: The stock's gained 150% over the past 12 months on buyout rumors and expectations that Brocade would be able to capitalize on gains from vendors like IBM and Dell turning away from Cisco. Priced for perfection, and now found to be less than perfect, Brocade's stock was doomed to fall. Here's how the numbers work out:

Post-blow-up, Brocade now sports a $2.3 billion market cap. It also carries a sizeable slug of debt. Its $500 million in cash and short-term investments, minus $376 million in long-term debt, and an additional $595 million in senior secured notes (debt by any other name still smells as stinky), leaves Brocade with a net-debt position of $471 million on its balance sheet, and raises the company's "enterprise value" to about $2.8 billion.

Turning now to the statements of income and cash flow, we find Brocade still (barely) unprofitable from a GAAP point of view, but generating a substantial amount of cash -- $175 million worth of the stuff over the past 12 months, in fact.

Foolish takeaway
What this all works out to, therefore, is a company whose enterprise value to cash flow ratio stands at about 16 times. Relative to yesterday's analyst expectations of 13.5% long-term profits growth, this alone wouldn't be too bad -- slightly overpriced, but not worrisomely so.

However, it's important to remember that Wall Street's 13.5% projection was assembled before management warned us that Brocade's revenues this year will come in 4% lighter than the Street had predicted. Logically, Wall Street's going to have to walk back its assumptions now. With revisions to future revenue already flowing in, Brocade's growth has already slipped to 11.9% as of this morning, and the lower it goes, the more overvalued the stock will become.

Long story short, the story at Brocade really is as bad as it looks. Harsh, yesterday's sell-off may have been -- but Brocade deserved every bit of it.

Ford Motor is a Motley Fool Stock Advisor selection, but Fool contributor Rich Smith has no position in any of the stocks named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 576 out of more than 150,000 members. The Motley Fool has a disclosure policy.