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" ...
It's shaping up to be a busy week over at Standpoint Research. On Monday, this stock shop took a brave stand in defense of battered banker Bank of America (NYSE: BAC). And now we learn that the tiny firm that beats the market is making the case for yet another brand name stock pick: Best Buy (NYSE: BBY).

Why? In a Street-defying feat, Standpoint employs pure logic to explain its latest pick: "In 2000, BBY had 400 stores and a $32 share price adjusted for inflation. Today, the company share price is $32 on a store count topping 4,000." Conclusion: Best Buy is worth a whole lot more today than it was worth 10 years ago, whether the stock price reflects that value or not. The question, though, is how much more? Or put another way:

 "Would Best Buy be as nice, at 10 times the price?"
Admittedly, a company that has 10 times the assets it once had shouldn't necessarily sell for 10x the price it once did. For one thing, all other things being equal, it's likely that said company's growth prospects have also been chopped by a factor of ten.

Also admittedly, all things rarely are equal. Since 2000, we've seen the demise of Best Buy-archrival Circuit City, the rise and fall of GameStop (NYSE: GME), the rise-and-still-rising of Amazon.com (Nasdaq: AMZN), and the entree onto the electronics retail scene of hhGregg (NYSE: HGG) as a retail rival, nationwide. (There's only so big a retailer can grow before it's faced with the prospect -- as the old Starbucks (Nasdaq: SBUX) joke went -- of opening new retail locations in the restrooms of its existing locations.)

Still, it does seem strange that Best Buy's market cap wouldn't receive any reward whatsoever for a tenfold rise in size. Something at least. Instead, as the analyst points out, the stock has lagged the S&P 500 by a good 30 percentage points since April 2010. To Standpoint's way of thinking, even in a world where the American consumer is conspicuously underconsuming, this is a bit of an overreaction. And so the analyst predicts a snapback at some point in the next 16 months, one that could lift Best Buy as much as 33% above today's depressed price.

But is Standpoint right? 

Let's go to the tape
On the one hand, the odds certainly don't seem in its favor. Over the past couple of years, we've watched Standpoint call it wrong on retail again and again in the Specialty Retail sector. Wrong on Gap. Wrong on GameStop. Wrong on Abercrombie & Fitch (but right about 'em too). That said, the margins by which Standpoint's lagging the market in this industry are so slim as to make yours Fool-y, at least, suspect there's still plenty of time for the picks to perform as planned. 

Call me a crazy optimist or just plain impressed with Standpoint's recommendations elsewhere in the market, where nearly 60% of its recommendations do outperform the S&P 500 (no mean feat), but I expect not only that the above recommendations, but Best Buy as well, will eventually turn around and reward investors.

Why? Because to my Foolish eye, the numbers demand this outcome. Consider: Selling for barely 10 times trailing earnings, and about 8.4 times forward estimates, but expected to grow these profits at better than 12% per year going forward, Best Buy fits the standard definition of a "value stock" to a "T." (Or perhaps, a "V.")

That's even before you factor in the potential for Best Buy's 1.8% dividend yield to turbo-charge returns. Before you notice that the company generates free cash flow nearly 40% greater than the "earnings" it reports under GAAP accounting standards. Add either of those factors in, and the stock only looks more undervalued.

Foolish takeaway
Now, maybe I'm totally wrong about this. (Maybe Standpoint is, too.) It could be that the consumer-led recession is already much worse than any of us suspect, that the king of electronics retailing has prospects dimmer, and a growth rate slower, than we fear.

But with Best Buy currently selling for just 7.3 time free cash flow, paying a respectable dividend, and carrying a nearly debt-free balance sheet, that's a risk I'm willing to take. To me, the margin of safety on this pick, at least, is so vast that I'm willing to be wrong as long as it takes -- because ultimately, I'm going to be proven right on Best Buy.

In fact, I'm so certain this pick is going to work out that I'm heading over to Motley Fool CAPS to put my reputation on the line, and publicly rate the stock an "outperformer." But if you feel otherwise, good for you! Come on over to CAPS, and bet against me. Please. I double dare you.