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.

A couple of weeks ago, we took a look at one of the best analysts on Wall Street, Wunderlich Securities, and why it thinks you should buy shares of Sirius XM (Nasdaq: SIRI), and why it's quite possibly correct about that. Today, we're going to flip the mirror upside-down, and take a stroll through the looking-glass world of one of the worst analysts on Wall Street and its buy rating on Sirius -- and come to precisely the same conclusion.

Meet Maxim Group
Our featured analyst this morning: Maxim Group, ranked in the bottom 20% of investors we track on CAPS. Bright and early Thursday morning, Maxim slapped the buzzer on its alarm, rolled out of bed, and initiated coverage on Sirius with a "buy" rating and a $1.40-per-share price target (40% above the buck-a-share price of today.) Calling Sirius "the [Amazon.com (Nasdaq: AMZN)] of the radio space," Maxim argued the company's got real potential to expand its current 8% presence in the auto world, as automakers from Ford (NYSE: F) to Toyota (NYSE: TM) and beyond continue sponsoring the company's wares as an incentive to put rubber on the road.

In fact, Maxim thinks Sirius could grow as high as 27 million subscribers by the end of 2014, giving it a 10% dashboard share in the U.S. According to the analyst, this would work out to about 24% growth in earnings before interest, taxes, depreciation and amortization (EBITDA) annually over the next five years, making the stock's "14.5x 2011 EV to EBITDA multiple" a bargain in Maxim's book.

So what?
Now admittedly, Maxim isn't exactly the kind of analyst you want to bring home to meet Mama -- or have running her retirement portfolio. Nearly three times out of five, this analyst guesses wrong on its stock picks. On average, anything Maxim tells you to do usually winds up costing you 3.5% worth of market underperformance.

Worst of all, Maxim is just terrible at picking entertainment-type stocks. When it told people to sell Netflix (Nasdaq: NFLX) last year, for example, investors who heeded the advice, and didn't wise up in time, ended up underperforming the market by as much as 230 percentage points. Totally upside-down. And Maxim's other moves haven't been much to write home about either: 

Maxim appears to have had particular difficulty with problem-plagued companies like the heavily indebted Carmike, and the profits-starved RealNetworks. Considering the parallels with Sirius, therefore, the question naturally arises: Why do we care what Maxim thinks about Sirius?

Um ...
Honestly, I can't think of a good reason -- except for the single, very good reason that the analyst appears to be right.

I mean, set aside the analyst's record for a moment. Ignore the CFA gobbledygook of acronyms and abbreviations that makes up Maxim's buy thesis. (A "14.5x 2011 EV to EBITDA multiple?" What the heck is that, anyway. And even if you understand what it is, how much sense does it make to just ignore the interest that Sirius pays on its mammoth $3 billion debt load, and value the stock on EBITDA?)

Instead, focus on the plain facts in support of Sirius. Because from where I sit, they're more than enough to justify optimism about the stock. (And it's not just me.) After producing positive free cash flow in four out of the past five quarters, Sirius now seems to be firmly on the path to cash-cow status, generating free cash flow at about a $148 million-per-year clip. What this works out to is -- in contrast to Maxim's convoluted calculation -- a series of crystal-clear numbers for investors to crunch:

• Sirius stock sells for less than 27 times the amount of cash it generates in a year.
• It's growing its profits at (depending on whom you listen to) perhaps 30% per year.
• Last but not least, Sirius has the cash available today to begin paying down its $3 billion debt load, and to begin removing the share-overhang from Liberty Capital's 40% preferred stake, reducing investor risk.

Foolish takeaway
In short, Sirius has a path open to the future ahead of it. It's become a viable business model. And while I'm not 100% certain the shares are yet a "bargain," one thing at least is clear: For the first time in a long time, investors short Sirius at their peril.