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." While the pinstripe-and-wingtip crowd is entitled to its opinions, down here on Main Street, we've got some pretty sharp stockpickers, 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 ...
Auriga U.S.A. dropped an upgrade of Linear Technology (Nasdaq: LLTC) right into the feeding frenzy as the chip market started to digest Texas Instruments (NYSE: TXN) buying National Semiconductor (NYSE: NSM) for a cool $6.5 billion. It looks like the market largely ignored the upgrade as Linear rose about as much as any other analog chip stock today, with or without special analyst attention.

That's about the right reaction, if you ask me. For one, Auriga's upgrade moved Linear from the "sell" column into the modest "hold" area. Moreover, the one-year target price of $34 per share is just about where the stock sits today -- Linear even touched that exact price in intraday action on Tuesday. That's hardly a bold pick.

For another reason to ignore this upgrade, Auriga doesn't exactly have a stellar track record in the chip sector.

The firm has a rating on 17 chip stocks, including gutsy "underperform" or "sell" tags on CAPS darlings Texas Instruments and Applied Materials (Nasdaq: AMAT). But only six of those picks are on target today, though that haul includes two of Auriga's three best picks overall:

Spreadtrum and Micron are impressive gainers, and I happen to agree with Auriga's thumbs-up ratings there. But two good picks out of 17 hardly makes for solid investment advice.

All in all, this firm is not a household name, and that's for good reason: its CAPS incarnation ranks in the bottom 40% of players overall with a flip-a-coin accuracy rating of 47%.

Just because Auriga is a less-than-stellar stock picker doesn't make it a reliable counterindicator, of course. If anything, the firm should be applauded for getting Linear off its sell list at long last. This is, after all, a longtime Stock Advisor recommendation with a 96% approval rating from the CAPS community. A lot of smart people have put their faith in this stock, and they aren't afraid to explain why.

All-star CAPS player jemsa loves Linear for its efficient use of capital, which can be seen in a low P/E-to-ROE ratio. Other players like Linear's steady dividend payouts, its leadership position in the red-hot analog microchip space, and its big-name customer list.

Foolish final thought
To summarize what's so good about Linear, here's what another all-star player (that's me) said about the stock a year ago: "Cheap relative to the rebounding results, as well as the size and strength of the analog semiconductor market. I'm betting it'll take a couple of years for Mr. Market to come to his senses here."

It's been a year, and Linear's shares have largely tracked the broader market. The stock remains cheap, the business is strong, and the investment opportunity arguably as solid as ever. How many high-margin analog chip businesses do you see trading for 15 times trailing earnings? Linear's closest rival, Maxim Integrated Products, fetches a trailing P/E ratio twice that wide.

I don't think Auriga went far enough by just moving Linear Technology up to a "hold." In my eyes, this is a no-brainer buy with a lot of upside as the tablet craze takes the baton from last year's smartphone-mania.