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 ...
Sometimes, it takes a truly superior investor to tell you when there's something wrong with a stock. Other times, the problem smacks you right upside the head. Yesterday was both of those times. On the superior investor front, we're featuring R.W. Baird today, an analyst ranked near the top 10% of investors we track on CAPS, and one especially skilled at picking winners in the Software industry:


Baird Said:

CAPS says:

Baird's Picks Beating S&P By: (NYSE: CRM)



221 percentage points

Blackboard (Nasdaq: BBBB)



52 points (two picks)

McAfee (NYSE: MFE)



6 points

Source: Motley Fool CAPS.

On Wednesday, this All-Star investor announced it was downgrading language training software star -- and Motley Fool Stock Advisor recommendation -- Rosetta Stone (NYSE: RST), even as the company embarks upon a transformative new product offering. According to Baird, Rosetta's latest language software package will "fundamentally [transform] the way it views and interacts with its customers." In addition, the new software, called "Rosetta Stone Version 4 TOTALe," is said to feature new services, greater use of the Internet -- and a higher price tag, which Baird says will drive future revenue growth for the company.

All of which sounds good, and indeed, Baird insists it does still "view the company's long-term growth prospects favorably." Regardless, its enthusiasm about the new product is tempered by its fear that if you should flip over Rosetta Stone, you'll find something dreadfully wrong hiding just beneath.

Just yesterday Rosetta announced the departure of its CFO, effective Aug. 31 (just before the new product launches) -- with no replacement named. Baird comments: "We are hard-pressed to recommend putting new money to work as we believe the timing of this development adds risk to the story given its pending next-generation product launch in Q3 and significant investments the company is making internationally."

My reaction?

What she said
Baird's analyst is right. There do appear to be significant risks -- not just in investing in a company whose CFO is jumping ship (or being forced to walk the plank?), but also in investing in a relatively young company like Rosetta Stone, and one that's only been public for a little over a year. The fact that the stock costs more than 30 times earnings doesn't help matters, either. Not when other education-focused stocks out there, Apollo Group (Nasdaq: APOL) or ITT Educational (NYSE: ESI) for example, are selling in the low double-digits. And yet, from where I sit, the risks look justified.

How do you say "earnings" in free cash-ese?
Rosetta may be a young company, and it may run into a bit of turmoil without a plan for immediate succession for the soon-to-be-vacant CFO post. But I have to say: The price does still entice.

You see, while Rosetta isn't yet boasting a whole lot of earnings as GAAP accounting calculates such stuff, what it does have -- and has in abundance -- is free cash flow. More than $37 million generated over just the past 12 months, in fact. And after yesterday's tumble in stock price, this now leaves us looking at a stock that sells for just 12 times free cash flow -- but where earnings are expected to grow at better than a 17% per annum rate over the next half decade.

When you consider that the company already has some $99 million in cash in the bank, yet carries no long-term debt whatsoever? Well, I know we're talking about a language educator here, but to my Foolish eye, it's the mathematics that really attract at Rosetta Stone.

Foolish final thought
Between one high profile downgrade, and one MIA CFO, a lot of investors are panicking. As for me, I find that when other investors panic, that's often the very best time to buy.

Fool contributor Rich Smith owns shares of Blackboard. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 420 out of more than 165,000 members. The Motley Fool has a disclosure policy.

Apollo Group is an Inside Value selection. Salesforce is a Rule Breakers recommendation. Blackboard and Rosetta Stone are Stock Advisor selections, and Blackboard is also a Motley Fool Hidden Gems pick.