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." While the pinstripe-and-wingtip crowd is entitled to its opinions, we've got some pretty sharp stock pickers down here on Main Street, too. (And we're not always impressed with how Wall Street does its job.)

Given that, perhaps we shouldn't be giving virtual ink to "news" of analyst upgrades and downgrades. And we wouldn't -- if that were all we were doing. Fortunately, in "This Just In," we don't simply tell you what the analysts said. We 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 ...
(NYSE: HPQ) is making a splash this morning, as new CEO Leo Apotheker takes the stage in San Francisco to lay out for stock analysts his plans to revive the tech giant. Meanwhile, some of these self-same analysts have already moved on, and picked different winners of their own. BMO Capital Markets, for example, which on Friday took a page from Mark Hurd's playbook, and chose Oracle (Nasdaq: ORCL) over HP -- initiating coverage of Oracle with a buy rating.

Why prefer Oracle over HP today? According to BMO, the reason's simple, really: Around the globe, business spending is on the upswing, and chief information officers are busy "standardizing their IT infrastructure." Oracle is doing its best to make itself a one-stop shopping destination for their modernization dollars.

Convenience comes at a price
The real question, of course, is whether investors should do their shopping at Oracle. Because when you consider the 24-times-earnings valuation on the stock, and compare it to the P/E ratios at other tech titans -- HP, Microsoft (Nasdaq: MSFT), and Dell (Nasdaq: DELL) for example, all fetch only 11 times earnings. IBM (NYSE: IBM) costs only 14 times earnings, while even Apple (Nasdaq: AAPL) commands only a multiple of 20 -- a Fool could be forgiven for wondering if Oracle shares come at too high a price.

It's here, then, that Motley Fool CAPS really proves its worth, by permitting us to examine our "hunch" that BMO might be overambitious in recommending Oracle at today's price. By enabling us to put that hunch to the test, and see how similar recommendations from this analyst have worked out in the past. So let's do that:


BMO Rating

CAPS Rating
(out of 5)

BMO's Picks Beating
(Lagging) S&P by

Citrix Systems (Nasdaq: CTXS)



146 points




(16 points)




(25 points)

As you can see, a high share price isn't necessarily a bar to a stock outperforming the market -- and BMO's recommendation to buy Internet connectivity specialist Citrix (now valued at 48.5 times earnings) has certainly worked out well for investors.

Unfortunately, that recommendation may be the exception that proves the rule. Because the fact is that very few of BMO's recommendations in the software space work out as well as Citrix. To the contrary, over the five years that we've been tracking this banker's performance, only 36% of BMO's software recommendations have succeeded in outperforming the market. Simply put, for every "Citrix" BMO discovers, it tends to urge a pair of "VanceInfos" upon its clients -- with unfortunate results.

Oracle vs. The Oracle of Omaha
Call me a pessimist, call me a Fool, but I fear a similar outcome from Friday's Oracle recommendation. Here's why: Leave aside the stock's obviously too-high P/E ratio. It's actually a bit of an illusion, as Oracle actually generates considerably more free cash flow than it reports as "net income" under GAAP. With $8.7 billion in cash profits generated over the past 12 months, this gives the stock a very reasonable price-to-free cash flow ratio of 18.5.

But note that I say "reasonable," not "cheap." Dominant in its industry, I actually feel that 18.5 times free cash flow may be a fair price to pay for Oracle. (Even though most analysts only expect it to grow at 15% per year going forward.) Personally, though, I'd much rather buy the stock at a discount -- follow the Oracle of Omaha's advice, that is to say, and buy with a margin of safety.

Foolish takeaway
Whichever way you look at Oracle, whether as a stock priced at 24 times earnings, or one that costs only 18.5 times free cash flow, that margin of safety does not exist today. Oracle's price being only "fair," my advice would be to keep BMO's enthusiasm in mind -- but not act on it until (unless) the stock declines in price.

And if that happy day never comes? If Oracle's stock never does become cheap enough to buy at a discount? No matter -- there are plenty of other stocks out there that are already cheap. (In fact, here are three of them for your perusal.)

Add Oracle to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.