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.

They're at it again
Get your checkbooks ready, Fools. Seems it's time to buy Yahoo! (Nasdaq: YHOO) again -- or so say two Wall Street analysts this week. In nearly identical upgrades, Pacific Crest and Gabelli both endorsed buying shares of the nation's No. 2 search provider on the theory that if you crack Yahoo! open and peer inside, you'll find much more value than is evident on the surface.

Running down the numbers real quick, the analysts are telling us that Yahoo!'s 35% stake in Yahoo! Japan is worth $5.38 per share (although if repatriated and subjected to U.S. taxes, such a sale would generate far less cash for Yahoo! shareholders). Yahoo!'s interests in Alibaba Group and its Alibaba subsidiary are even more valuable, worth a combined $4.96. Add in the company's $2.20 per share in net cash, and you've got a grand total of $12.54 in "asset value" at Yahoo!.

By this logic, if you subtract the value of "non-core" assets from Yahoo!'s share price, the analysts conclude that investors are valuing Yahoo!'s core U.S. search business at a measly $3.83 per share! Surely Yahoo! must be worth more than that.

Nothing's certain. And don't call me "Shirley."
Well ... not so fast. I admit, the possibility that Yahoo!'s assets are being undervalued and overlooked by Mr. Market has intrigued me, too, from time to time. But before jumping to some "great minds think alike" conclusion ... let's take a look at the minds that are recommending Yahoo! this week.

Honestly, we don't know a whole lot about Gabelli's or Pacific Crest's skill as stockpickers. Neither analyst reports its recommendations to with any regularity, and what doesn't get reported, cannot be measured by CAPS. What we do know, however, is that Pacific Crest has tipped its hand to the market twice in the past two years, and made its ratings public. It's floundered badly each time:


Pacific Crest Said


Pacific Crest's Picks Lagging S&P by

Websense (Nasdaq: WBSN) Outperform *** 29 points
Brocade (Nasdaq: BRCD) Outperform ***** 59 points

Both of these recommendations, dating from 2010 and 2009, respectively, have badly underperformed the market -- in fact, as the market has gone up, they've both gone down, actually losing investors money. Not a propitious start for Pacific Crest's entry into the world of publicly making stock picks, I fear.

So rather than make the obvious argument that, if Microsoft (Nasdaq: MSFT) costs $28 a share, and Google (Nasdaq: GOOG) fetches $613, surely Yahoo! must be worth more than three bucks and change ... let's stretch our minds a bit today, and consider what might go wrong with the analysts' endorsement this week.

"Search"-ing for value
According to the analysts, Yahoo!'s core business costs less than $4 a share, yet this core business is currently generating nearly $0.50 per share in annual free cash flow. Fine. So a price-to-free cash flow ratio of less than eight. Is this cheap?

Well consider a few of the companies in Yahoo!'s peer group. Microsoft carries a valuation of roughly 10.3 times free cash flow today. Google costs 28 times. Compared to those two, Yahoo! may well be cheap. But Google is thriving, and Microsoft isn't doing half bad either lately. Compare Yahoo! to someone closer to its own level of business performance, AOL (NYSE: AOL), say, and what you'll find is that AOL currently costs less than 5 times free cash flow. Relative to that one, even Yahoo! looks expensive.

Foolish takeaway
Clearly, there's room for arguing, on both sides, whether Yahoo! is cheap or not. Pacific Crest and Gabelli would probably tell you that with an 11% projected growth rate, the 8 times valuation on "rump Yahoo!" is a bargain price. Me, I'd point out that in order to get to that valuation, you need to first strip away the best parts of Yahoo!'s business – Yahoo! Japan and Alibaba -- the parts that Yahoo! probably needs to create that growth rate.

In short, with Yahoo! Japan and Alibaba, Yahoo! looks to me like a company generating $500 million a year in free cash flow and selling for a price 43 times that sum -- expensive for an 11% grower.

Without Yahoo! Japan and Alibaba, I still don't see Yahoo! as cheap -- even at "under $4 a share." Any way you cut it, I just don't see the value here.

Fool contributor Rich Smith owns shares of Google. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 678 out of more than 170,000 members. The Motley Fool has a disclosure policy.

Google and Microsoft are Motley Fool Inside Value picks. Google is a Motley Fool Rule Breakers recommendation. Yahoo! is a Motley Fool Global Gains choice. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Google, and Microsoft.

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