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 ...
Is it time to get back into Western Digital (NYSE: WDC) stock? Two of the smartest stock pickers in Fooldom -- namely, my Foolish colleagues TMFZahrim and TMFRhino -- recently went on record to say so. And last week, one of the smartest stock pickers in the world of "official" stock picking finally agreed with them.

On Friday, as most stock traders were packing their bags and heading to the beach for the weekend, the value hounds at Standpoint Research stayed late at the office and opened up a buy recommendation on Western-D instead. Taking a bow for having cleverly exited the stock last year with a "50% gain on the position," and a victory lap for standing pat as the stock subsequently dove 40% "in a flat market," Standpoint says now's the time to make a new trade on Western Digital -- and buy it.

So what?
Why should you care what Standpoint thinks about Western Digital? Well, there's the analyst's record, for one thing. Out of the more than 165,000 investors, lay and professional, whom we track on CAPS, Standpoint consistently stands out as one of the best. (Literally.) And 59% of the time Standpoint recommends a stock to its clients, that stock proceeds to thrash the market. And I don't say "thrash" lightly. Historically, the average Standpoint recommendation has outperformed the market by better than 12 percentage points.

Standpoint is particularly good within the computers and peripherals segment of the market, where it's entered and exited stocks multiple times with generally favorable results, beating the market's returns by nearly 100 percentage points, combined, across the breadth of its recommendations:

And don't let overlook Standpoint's best pick in this sector: Western Digital itself. After recommending that investors buy the stock in November 2008, Standpoint eclipsed the market's returns by nearly 70 percentage points on this single pick alone. Now Standpoint's getting ready to repeat the feat. Will it succeed?

One word: yes
Seeing Western-D sell off after Wednesday's earnings report, Standpoint ran a quick check and came to the following conclusion: The stock is now simply too cheap to pass up. Citing its proprietary "155-variable computer model," Standpoint says Western Digital ranks No. 6 out of the 500 stocks in the S&P 500 on a valuation basis. At $28 and change, the analyst believes investors today are being offered a very nice price at which to reenter the stock.

I agree.

Selling for just five times trailing earnings, and 6.1 times next year's more muted projections, Western Digital seems priced for going out of business. Yet the consensus on Wall Street is precisely the opposite -- that Western Digital will survive its current slump and go on to grow at 12% per year for the next half-decade, a faster rate than even archrival Seagate Technology (NYSE: STX) can boast.

Speaking of Seagate, it's worth pointing out that while its rival seems to offer a better bargain at four times the earnings today, Western-D has something Seagate lacks: cash. While debt and cash are more or less equally balanced at Seagate, Western-D is simply brimming with green, its $400 million in debt vastly outweighed by a treasure trove of more than $2.7 billion in cash. And there's more where that came from, too.

Foolish final thought
Western Digital generated $1.2 billion in free cash flow over the past 12 months, with the result that its enterprise (the company itself, net of both its cash and debt) is valued at the astoundingly low price of just 3.4 times free cash flow. For a company that's projected to grow at 12% per year for the foreseeable future, that's a ridiculous price the market is charging for this cash-rich, debt-light stock.

My advice: If Mr. Market wants to give you these shares at rock-bottom prices, take him up on the offer. Good deals don't get much better than this.