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 ...
I come bearing good news and bad news for Walgreen (NYSE: WAG) shareholders today. Good news first: Up on Wall Street, your stock got upgraded to "buy."

Walgreen was praised for providing "improving customer service" even as it demonstrates good "expense control," predicted to benefit from a nastier flu season this year, and poised to profit even more from a wave of "heavy script using 65-plus population. According to the analyst, the retiring baby boomer population is "estimated to grow just over 3 percent per year," will "fill over 25 prescriptions annually" and is very likely to fill said scripts at existing Walgreen stores, seeing as the pharmacy industry "has seen little store growth" in recent years. This, as I say, is the good news. And now here's the bad: The analyst doing the upgrading yesterday was none other than Jefferies & Co.

Let's go to the tape
Ordinarily, of course, this would be a good thing. Ranked in the top 15% of investors we track, Jefferies is in many respects a fine analyst. Problem is, the one industry in which Jefferies consistently underperforms the market just happens to be the one Walgreen inhabits: Food and Staples Retailing. Just a glance at the analyst's record should suffice:

Sadly, over the three years we've been tracking this analyst's picks in this industry, Jefferies has gotten nearly twice as many picks wrong as right. Barely 35% of its recommendations in the area are beating the market, while nearly 65% have posted returns inferior to those of the broader S&P 500 index.

Hardly an encouraging record. But, that brings us to the other bit of good news this week: Jefferies' multiple failures in the industry notwithstanding, this time I think the banker has called one right. Walgreen really is destined to outperform the market.

A good omen
I say this not just because of the market-topping sales results Walgreen reported yesterday, by the way. Fact is, while Wall Street seemed encouraged by the company's 5.3% rise in September sales, most of the gains came from Walgreen's addition of Duane Reade sales to the mix, while "comps" gains fell short of even 0.5% -- hardly inspiring.

What I do find inspiring about Walgreen, though, is the valuation. As I explained back in June, Walgreen looks a whole lot more attractive than its peers in the pharmacy space. Selling for just 12.1 times free cash flow, but expected to grow at nearly 13% per year over the next five years, Walgreen's stock looks value-priced all by its lonesome -- but it looks even healthier relative to its rivals. CVS for example, costs 70% more than Walgreen on a price-to-free cash flow basis. CVS also carries a much heavier slug of debt. Rite Aid (NYSE: RAD) ... don't even get me started about Rite Aid. That company's debt issues dwarf any arguments the stock might have in its favor.

Foolish takeaway
Indeed, debt concerns touch pretty much every stock named above as a Walgreen competitor, save Costco alone. But really, you don't even need to go that far -- to compare one stock to another, try to figure out which of these stocks is the "least worst" choice available -- to see why Jefferies is right about Walgreen. Possessed of a near-spotless balance sheet, paying a respectable 2.1% dividend, and generating free cash flow in abundance, Walgreen stands on its own as a clear value, and a healthy addition to any portfolio.