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 this the end of Seagate's (NYSE: STX) slide? For the past six months, the hard-drive maker has been on a seeming unending downtrend, but lately, Seagate seems to have found some strength. Yesterday, market maven Brean Murray helped push the stock up to a recent high with a pronouncement that Seagate's fundamentals are stabilizing, which should lead to "improved sentiment" among investors. Presumably, once that happens, a higher stock price will follow because investors will be reassured that the sky has stopped falling. Ultimately, Brean sees Seagate hitting $16 a share within 12 months.

And not a moment too soon. I mean, have you checked the valuation on this stock lately? Seagate is trading for less than four times earnings. The company has no net debt. And according to Wall Street, the company's poised to post five years of earnings growth at an average rate of 11.5% per year! How could this pick possibly go wrong?

Let's go to the tape
A number of ways, actually. As you've probably heard, the big worry here is that Apple (Nasdaq: AAPL) has an iPad -- but that iPad has no hard drive. Instead, it's got solid-state drives. As iPad sales steal revenue from more traditional PC makers, investors worry that Seagate and archrival Western Digital (NYSE: WDC) will be left out in the cold.

But speaking of Western Digital, just look at how well Brean has navigated the tides of uncertain sentiment surrounding that stock -- and others in the computer peripherals space:

Sure, Brean may not be doing as well with its PC-maker picks ... 

... but the fact remains that Brean has proven itself a savvy judge of value in gauging demand for enterprise storage (EMC), computer printers (Lexmark), and yes indeed, Virginia -- hard-drives (Western Digital).

Open the floodgates for value
And call me crazy, call me a Fool, but I think there's value to be found in Seagate, too. Perhaps not quite as much value as the sub-four P/E ratio suggests, but still plenty of opportunity to profit.

Seagate generates somewhat less free cash flow than its GAAP-formatted income statement suggests, you see. Still, it makes enough cash to score a price-to-free cash flow ratio of 4.5, which to me seems plenty cheap for an 11.5% grower.

Nor am I the only investor to think so. Nor is Brean. Last week, you see, Morgan Stanley gave its vote of confidence to the stock as well (and to Western Digital, incidentally). Citing "a modest quarter-over-quarter uptick in PC shipments," and postulating that "further downward earnings revisions ... are priced into shares," Morgan Stanley seemed to suggest that Seagate is a "bad-news-is-good-news" kind of a stock -- one of those rare birds for which even an earnings warning could spark a rally -- at least, so long as the earnings warning isn't too awful.

Foolish takeaway
Today, Seagate is priced for a long-term decline in its business, a "long day's journey into night." But here's the good news for investors at today's prices: Even if Seagate falls short of the 11.5% growth it's assumed to achieve -- even if it misses the mark by half -- the stock is still worth more than Mr. Market is charging for it.

All we need to do is muster the courage, and turn the key to unlock the value in Seagate.