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 ...
Piper Jaffray has sounded a bullish note on networking star JDS Uniphase (Nasdaq: JDSU) yesterday. According to the analyst, "the optical space has shifted from a cyclical industry to a secular growth market and ... JDSU will benefit given the attractive growth expected for this space."

Piper sees particular promise in JDS's sales into the Long Term Evolution (LTE) market. In September, JDS inked a new contract to build a 4G LTE network for Chunghwa Telecom in Taiwan, followed by a similar deal with SingTel in Singapore. As telecoms the world over race toward the prize of building out 40-to-100 Gbps superfast optical networks, Piper thinks JDS is just the company to help get them there. As proof, Piper points to the company's "growing revenues and expanding operating margins," and predicts that this quarter, JDS will hit the "high-end of guidance" and report earnings "comfortably above consensus."

To investors who've still got Cisco's (Nasdaq: CSCO) sour earnings note ringing in their ears from last month, Piper's bullish blast may strike a discordant tone. But Cisco lost market share to someone last quarter. And just because the analysts have been saying that Juniper Networks (Nasdaq: JNPR) and Hewlett-Packard (NYSE: HPQ), Riverbed (Nasdaq: RVBD) and F5 Networks (Nasdaq: FFIV) stole Cisco's thunder doesn't mean that JDS didn't get in on the fun as well.

I think there's every chance that Piper will be proven right about JDS's sales success -- and that it won't matter a whit.

Let's go to the tape
Take a look at Piper's record in the Communications Equipment industry:

The analyst's recommendations of F5 and Riverbed have worked out splendidly for investors who took Piper's tune to heart. But on average, this analyst gets more of its Comms picks wrong than it does right. Overall and over time, Piper only beats the market's performance about 38% of the time on its picks in this industry. Why? I suspect the reason tracks right back to this week's recommendation of JDS-U.

JDS Uber-pricey
Piper may be 100% right about this "secular growth market" happening, but even the most spectacular growth story Piper can imagine appears already wholly priced into JDS's stock.

At 39 times its annual rate of free cash flow ($79 million), investors already have JDS priced for hypergrowth going forward. Yet most folks on Wall Street don't think the company will manage to put together much more than 17% annual growth over the next five years. Don't get me wrong -- 17% isn't shabby at all. It's faster than either Cisco or Ciena are expected to grow, albeit slower than Riverbed, Ciena, or Juniper. But to my Foolish eye, it's not fast enough to justify the premium price now attached to JDS's stock.

Foolish takeaway
Like I said, Piper Jaffray may be right about the bright future for 4G networks. Personally, though, when speculating about the future, I like to buy stocks with a good-size margin of safety, just in case I'm wrong. Investors who buy JDS at today's price, though, are doing the exact opposite.

Even assuming that they're right about the future, they're paying for performance that hasn't happened yet.