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.

Following the best
What do you do when one of the greatest investors in history (Warren Buffett, if you hadn't guessed) tells you that the Great Recession is over? What do you do when one of the best analysts out there agrees with him, predicts a return of the commodities boom, and tells you that the best way to capitalize on it is to buy Caterpillar (NYSE: CAT) stock?

Do you listen?

I do. And what I'm hearing this week is that Avondale Partners, ranked in the top 6% of investors we track on CAPS, believes the global economy is ready to grow again, and that Caterpillar will grow with it. Whether it's mining the raw materials that fuel economic growth, or growing the food that wealthy populations can afford to eat, Avondale reminds us that Caterpillar makes the machines that keep the global economy humming.

According to Avondale, it doesn't really matter if the recovery arrives swiftly or takes its sweet time. Caterpillar's long-term potential makes the company a "buy" in either instance.

At the same time as Avondale was initiating coverage on Cat with a bullish bent, fellow All-Star investor Wells Fargo was reiterating its own "outperform" rating on the stock. "We believe that several catalysts are becoming visible to support expectations for longer-term growth," said Wells, assigning the stock a valuation of somewhere between $73 and $75 a share -- with "upside potential to our valuation range."

Let's go to the tape
But here's the bad news: Avondale may be a fine analyst in many sectors (last year's advice to pick up shares of Dolby (NYSE: DLB), for example, and this year's suggestion that US Airways (NYSE: LCC) was due for a rebound are both working out brilliantly). But Avondale has just about no reputation in the Machinery sector, according to CAPS. Caterpillar is its first public pick in this industry in at least three years.

And the worse news: Wells' "me too!" shout-out on Cat doesn't really help Avondale's case, because while Wells has more Machinery sector experience, it's batting precisely .500 on its picks there (a good number in baseball, but in investing? Not so much).


Wells Says:

(out of 5):

Wells' Picks Beating (Lagging) S&P By:

Deere (NYSE: DE)



8 points (two picks)

Cummins (NYSE: CMI)



8 points

Terex (NYSE: TEX)



(14 points) (two picks)

Navistar (NYSE: NAV)



(39 points)

Damned with faint praise
Wells did make a nice pick of Caterpillar in 2007 and scored 31 points with it, but its recommendation to buy Caterpillar today gets undermined by the very language in which Wells voices it.

You see, while Wells sides with Avondale in arguing the long-term bullish case for Caterpillar, the analyst also warns that short-term prospects don't look so hot: "Short-term demand trends appear to be weaker than previously anticipated, and we are decreasing our Q1 10E EPS to $0.30 from $0.45 and are now beneath consensus. We are also lowering our 2010 and 2011 EPS estimates to $2.75 and $4.50, respectively, from $2.90 and $4.70."

But we're supposed to invest for the long term, right?
Even long-term, I see a fatal flaw in the Wells/Avondale case for Caterpillar. Pardon my bluntness, but over the long term, Cat has been a real dog of a business.

Right now, the stock's selling for a sky-high 43 price-to-earnings ratio driven up by the company's miserable 2009 performance, in which it earned just $895 million. But even if you value Cat on its average earnings over the past 10 years, it still works out to just $2 billion a year, and values the stock at over 19 times average annual income. And it gets worse.

The fact is, as overvalued as its GAAP numbers already make Cat look, they may be giving the company too much credit. Examine the company's income statement, and you'll find that far from earning consistent profit in the $2 billion-per-year range, this company actually burns cash more often than not. Over the past 10 years, Caterpillar has racked up free cash flow losses around $5.2 billion in aggregate. And none of this factors in the nearly $30 billion in net debt that the company sports.

Foolish takeaway
What we see this week is a pair of analysts -- one with a middling record in Cat's industry, and the other with no record at all -- telling you to buy Caterpillar on its long-term prospects. (Because in the short term, they see Cat running into the briar patch.) And viewed from this very long-term perspective, Cat has failed to generate positive free cash flow over a 10-year period that included one of the biggest commodities booms in recorded history.

Cat is a stock that only a dog person could love.

Dolby Laboratories is a Motley Fool Stock Advisor selection, and the Fool owns shares of Terex.

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. 606 out of more than 160,000 members. The Motley Fool has a disclosure policy.