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." 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.

And speaking of the best ...
A couple weeks ago, I blasted Wall Street for bailing on Las Vegas Sands (NYSE: LVS) just as it looks ready to turn the corner.

Fearing the risk raised by a wrongful termination lawsuit brought by one of Sands' Macau-based executives -- and the SEC investigation it attracted -- both Jefferies and Argus Research downgraded Sands-stock. But I called the risks overblown, pointing to a history of SEC enforcement actions against IBM (NYSE: IBM), Lucent (now Alcatel-Lucent (NYSE: ALU), Monsanto (NYSE: MON) and others, all of which alleged bribery of foreign officials (as Sands' employee alleges). All of which came to naught. I argued the Sands lawsuits would prove similar -- creating horrible headlines, but ultimately having little effect on the company's operations. Now, it seems someone agrees with me: UBS.

You & Me, UBS
Pointing to the 20% decline in stock price that Las Vegas Sands has endured since last November, UBS argues any "risks" posed by the litigation and SEC investigation are now fully factored into the stock price. UBS admits that "Macau gov approvals ... Cotai apartment sales, labor quotas, and table additions ... have slightly more risk," and that the headlines could look bad for Sands for "some time before a formal conclusion" to the investigations. Regardless, the analyst doubts we'll see "any impact on day-to-day operations in Singapore or LV."

And you know what? UBS just might be right.

Let's go to the tape
At least, if its record in the Hotels, Restaurants and Leisure industry are any indication, UBS probably has a much better "feel" for how this is going to play out than do either Argus or Jefferies. You see, not only is UBS one of the best analysts we track on CAPS (outperforming better than 90% of all investors). It's also one of the best casino stockpickers out there:

Despite the occasional stumble (cough, cough, Melco), UBS gets the majority of its casino picks right, and over the long term, more than 60% of its recommendations in this industry ultimately outperform the S&P 500. Most telling of all, UBS has recommended buying Las Vegas Sands shares twice in the past year -- and outperformed the market by a combined 103 percentage points on these picks.

Lather, rinse, repeat
It's also interesting to note that in some respects, Las Vegas Sands closely resembles UBS's previous prescient pick of Wynn Resorts. Consider: A couple years back, I took a look at Wynn, and its history of burning cash, and concluded it was unlikely that stock would ever prove a profitable investment for investors. I was wrong.

After years of burning cash, Wynn slowly approached free cash flow-breakeven in 2009 -- and then turned the corner and hit the gas. Today, the company's generating upwards of $770 million in cash profits annually. (MGM, too, has turned firmly and consistently FCF-positive.) Could Las Vegas Sands be next in line?

I believe it is. Sands has already stopped piling up debt, and begun paying it down. Operating cash flow is rocketing upwards, while capital expenditures have stabilized -- a trend that, if it continues, should yield massive generation of free cash in years to come. (Indeed, my fellow Fool Matt Koppenheffer argued last week that if everything goes right, Las Vegas Sands could conceivably triple in value over the next five years.)

Foolish takeaway
Sands stands at a tipping point today. It's in the stock market equivalent of a "critical state," where it could flash to steam in an instant, or get pushed back below the boiling point by an adverse legal result. Not free cash flow positive yet, Sands could become so any day now, causing profits to erupt.

Which way will things go? It's never easy to predict a company's growth rate, and get a firm handle on its valuation, at times like these. But UBS is right -- 20% cheaper than in November, and 15% off its more recent highs of February, a lot of the risk has already been boiled off Las Vegas Sands' stock. If you were waiting for the right price to roll the dice on this stock, now looks like a good time to give it a shot.