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." Here, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.

Start the insanity
Earlier this week, I dismissed one major investment banker's upgrade of Ford (NYSE: F) as unjustified. While explaining why Ford is overpriced, I mocked Harley-Davidson's (NYSE: HOG) "simply absurd valuation of 64 times earnings." Surprise, surprise -- somebody just upgraded Harley, too.

According to StreetInsider.com, Wedbush Morgan cited a series of trends working in Harley's favor when making its "outperform" call on the stock: "continued market share gains," "a recovering retail environment for premium motorcycles," "dealer inventory restocking," and "increased profitability and lower credit risk."

Let's go to the tape
Clearly, Wedbush finds nothing absurd about Harley's stock price. And HOG bulls (can we call them "boars"?) will be glad to learn that Wedbush is one of the market's better stockpickers. Ranked in the top decile of investors tracked on CAPS, Wedbush outperforms more than 90% of the investors we track.

Nor does Wedbush let a high P/E disqualify an otherwise promising investment. While relatively inexperienced in the field of automotive stocks, the analyst has a long history of investing in the pricey tech sector. In its No. 1 field of research, software stocks, Wedbush has fearlessly recommended buying such highfliers as Blackboard (Nasdaq: BBBB), VMware (NYSE: VMW) and salesforce.com (NYSE: CRM), with admirable results:

Company

Wedbush Rating

CAPS Rating
(out of 5)

Wedbush's Picks Beating
S&P by

Blackboard Outperform *** 44 points
VMware Outperform *** 153 points
Salesforce Outperform * 71 points (picked thrice)

What do these software stocks have to do with Harley-Davidson? At P/E ratios of 77, 96, and 277 (!) respectively, they often look a whole lot more expensive when valued on their GAAP earnings than they turn out to actually cost, when valued on their cash profits. Blackboard, VMware, and Salesforce each generate free cash flow several times higher than their GAAP earnings let on. So does Harley-Davidson.

Before turning ignition, engage brain
As it turns out, while Harley's 64 P/E ratio certainly doesn't look good when compared to the 20 P/E at Polaris (NYSE: PII), or the sub-5 P/E at Honda (NYSE: HMC), it isn't quite as crazy as it appears.

If you dig into Harley's cash flow statements, you'll find that Harley generated free cash flow in excess of $900 million last year -- roughly seven times greater than the annual net income on its GAAP-constrained income statement. At a price-to-free cash flow ratio of just more than 10.5, you can argue that the stock's actually not that crazily priced after all. (Especially when you figure Harley's 1% dividend into the mix.)

Foolish takeaway
I'm not endorsing Harley's stock myself. To me, a P/FCF ratio of 10 on a 10% grower like Harley makes the stock look only "fairly priced," not "bargain priced." For Harley to outperform from this point forward, and reach the $48 price target Wedbush has set, management will need to hit the sales targets Wedbush has set for it and deliver the improved profit margins Wedbush also predicts. That could be tricky in an era of rapidly rising raw-materials costs.

But even if Harley-Davidson isn't clearly "cheap," is it a good company, at a fair price? I'll give that an unqualified "yes."

Salesforce.com and VMware are Motley Fool Rule Breakers recommendations. Blackboard and Ford Motor are Motley Fool Stock Advisorselections. Blackboard is a Motley Fool Hidden Gems pick. The Fool owns shares of Ford Motor.

Fool contributor Rich Smith does not own (nor is he short) shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 552 out of more than 170,000 members. Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.