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 ...
Every once in a while, a new rating finds its way into this column and ... absolutely throws me for a loop. That's what happened yesterday, when news arrived that Sterne Agee had initiated coverage of LCD glassmaker Corning (NYSE: GLW).

I mean, I've got no quibbles with Sterne Agee's logic on this endorsement. Reviewing the company's recent first-quarter report, Sterne Agee found Corning "well-positioned to benefit from the increased penetration of liquid crystal display (LCD) panels into televisions, flat-panel monitors, notebooks and mobile handsets."

The company's adapting well to "rapid shifts in panel-size demand" -- be that from manufacturers like Samsung and Panasonic (NYSE: PC) building ever larger-screen TV sets, to Apple (Nasdaq: AAPL) introducing its expanded-size screen iPad on the small-scale device end. And Corning's flexibility is "helping it maintain share in this constantly changing environment." Meanwhile, "demand for LCD panels continues to be strong, the supply/demand dynamics have helped keep pricing stable, supporting Corning's margins."

All that sounds good to me. And I'm particularly pleased to see that Corning's working to allay my valuation concerns. Last quarter's numbers showed a significant jump in operating cash flow, which paired with a decline in capital spending to give the company $1.7 billion in free cash flow over the past year. Result: The dominant manufacturer of LCD glass now trades for a not-insanely high multiple of roughly 16 times free cash flow. Based on predictions of long-term earnings growth of a bit over 12%, and with a modest 1.1% dividend adding further support, I wouldn't exactly call the price a bargain, but it's no longer unconscionable.

Meanwhile, for price-to-earnings focused investors, Corning does pose an attractive value proposition. Reported net income, as calculated under GAAP, continues to show Corning trading at an attractive 10 times multiple.

Out of its scope?
So if it's not Sterne Agee's logic, and not Corning's valuation, that bothers me, what is it, precisely, that gives me pause about this upgrade? What prevents me from following its advice and buying shares of Corning?

It's Sterne Agee's experience. Or rather, its lack thereof. You see, Sterne has established itself as a standout picker of specialty retail stocks -- a category that includes purveyors of LCD TVs Best Buy (NYSE: BBY) and hhgregg (NYSE: HGG). Yet a close review of our CAPS records reveals that Sterne Agee has not actually published recommendations on either of these companies -- or on any other names relevant to the retailing of LCD TVs. No rating for Wal-Mart Stores. No opinion on Sears Holdings. Nothing on Amazon.com, either.

Forgive me for being blunt, but if Sterne Agee is basing its buy recommendation on Corning largely on an assertion that "demand for LCD panels continues to be strong," I'd really like to see some evidence that the analyst has proven it knows what it's talking about -- with a record of outperformance picking retailers, who are first in line to demonstrate that demand.

Instead, what kinds of retailers do we find Sterne Agee most closely focused on? Clothiers.

Nor does Sterne Agee have an established record higher up the supply chain. No picks drawn from the ranks of the makers of LCD TV sets. No picks of any electronics consumer goods, that I can see.

Foolish takeaway
Listen, Fools. I'm not saying Sterne Agee is wrong about Corning being a buy. To the contrary, the analyst's overall record is superb, and within the specialty retail sector in particular, it has always been a standout, sporting 70% accuracy on its picks. Fact is, if Sterne Agee did try its hand at picking a few of the purveyors of sets incorporating Corning's glass, I suspect it would do marvelously. I'm just plain thrown by the fact that it has not.

And it seems I'm not the only one. Investors don't appear to be giving Sterne Agee's opinion much weight at all, selling off Corning stock by more than 3% yesterday morning before the afternoon's freak show despite the analyst's positive write-up. So ... let's see if we can help out a bit. A lot of you have established records on Corning and other companies in its industry, right? So click over to CAPS right now and rate the stock yourself. Let's see if we can give our fellow investors a little more credible advice to work with.