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 ...
As trading wound down ahead of the long weekend, one group of investors departed Wall Street with wallets noticeably fatter. Who were these happy folks? Shareholders of Brazilian planemaker Embraer (NYSE: ERJ), recipients of a coveted upgrade to "conviction buy" from the friendly analysts at Goldman Sachs.

According to Goldman, this is an "under the radar" stock. (And it may be to some folks. At Motley Fool Stock Advisor, however, we've been recommending Embraer for
more than six years now, during which time the stock has doubled the S&P 500's returns). But whether investors know it, or not, Goldman says Embraer is "uniquely positioned, emerging market driven," and offers investors "a strong balance sheet and 3% dividend yield." Reasons which when added up earn Embraer Goldman's highest possible stock rating.

But does Embraer deserve it?

Let's go to the tape
Most investors appear to be taking the upgrade at face value ... a "value" that's apparently 10% higher than whatever Embraer fetched the day before Goldman noticed it. Shares spiked in the wake of the upgrade, climbing one-third of the way toward Goldman's posited $39 price target.

But lest you assume this is some kind of knee-jerk reaction to the Goldman imprimatur, it's worth pointing out -- Goldman may be worth knee-jerking when it comes to aerospace stocks like Embraer. Because the simple truth of the matter is that the analyst has proven itself very, very good at picking these kinds of stocks. Consider the performance of Goldman's current stable of aerospace picks:


Goldman's Rating

CAPS Rating (out of 5)

Goldman's Picks Beating S&P By:

L-3 Communications (NYSE: LLL)



25 points

Lockheed Martin (NYSE: LMT)



13 points

BE Aerospace (Nasdaq: BEAV)



12 points

Source: Motley Fool CAPS.

Fact is, with the unfortunate exception of Boeing (NYSE: BA), every single one of Goldman's active recommendations in this industry is currently crushing the market -- a record of 83% accuracy.

Furthermore, when you look at Embraer itself, the odds seem to favor Goldman continuing its winning streak in this industry. While the stock's 20 P/E may not impress you as "cheap" initially, a review of the cash flow statements at this Brazilian industrialist show the true value that lies underneath -- $1.2 billion in free cash flow generated over the past 12 months, a number four times as great as GAAP accounting rules permit Embraer to report as "net profit," and a number big enough to give the stock a price-to-free cash flow ratio of less than five. Fools, that's cheap.

Cheap for a reason?
Now admittedly, there may be good reason for the shares' current cheapness. Embraer's 2010 tally of planes delivered, which came out just yesterday, showed deliveries were essentially flat versus 2009 at 246 planes total. Customers aren't exactly beating down the doors with new orders, either. Firm orders collected in Q4 were up just 2% by value from September. A runaway (runway?) growth story this is not -- yet.

However, there are two things that could turn this around. Catalyst No. 1: Warren Buffett. As you may have heard, the Berkshire Hathaway (NYSE: BRK-B) CEO tossed a good $1 billion worth of business Embraer's way when
his NetJets subsidiary ordered up 125 new business jets from Embraer last October. For another, Goldman apparently argued this is just the beginning for Embraer, which expects a large uptick in business jet orders as the economic recovery gains steam.

Foolish final thought
You already know what I think about the "Business Jets Will Save the Day" Theory of Aerospace Stocks. I think it needs to be issued with a really big caveat, that this is not how things always play out.

That said, I remain willing to gamble on an aerospace stock if given
a big enough discount to account for the risk. To my Foolish eye, five times free cash flow is a big enough discount -- and Goldman Sachs is a good enough analyst to be worth the gamble.

Rich Smithdoes not own shares of, nor is he short, any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 712 out of more than 170,000 members. The Motley Fool has a disclosure policy.


Berkshire Hathaway is a Motley Fool Inside Value choice. Berkshire Hathaway and Embraer are Motley Fool Stock Advisor recommendations. The Fool owns shares of Berkshire Hathaway, L-3 Communications Holdings, and Lockheed Martin.


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