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." Today, we're going to try and 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.

Shock therapy for A123
Investors in car battery upstart A123 Systems (Nasdaq: AONE) got a shock -- the good kind -- yesterday, when none other than market titan Goldman Sachs saw fit to upgrade their stock from "neutral" to "buy." That single vote of approval proved sufficient to lift A123 stock 11% on a day in which the broader markets were all deeply in the red -- unsurprising, considering that Goldman sees the stock rising 63% over the next 12 months (according to StreetInsider.com). But what is it about A123, exactly, that Goldman finds so attractive?

According to the analyst, there are at least four factors that argue in favor of buying A123 today:

  • First, the winning away of Fisker Automotive from rival Ener1 (NYSE: HEV) last year.
  • Second, the likelihood that A123 will build on that success by landing a "major OEM partner for battery systems on a global auto platform."
  • Third, the addition of a new CFO "bringing increased transparency" to the company.
  • Fourth and finally, the possibility that A123 will win an Advanced Technology Vehicles Manufacturing (ATVM) loan from the Department of Energy. (ATVM is a federal program subsidizing electric car battery development. Past winners have included Nissan, Tesla (Nasdaq: TSLA), and Ford (NYSE: F).)

Goldman thinks investors are underestimating the chances of A123 capitalizing on these opportunities, and "discounting just the current chapter of the story." In contrast, the analyst is focusing on these "specific catalysts that improve revenue visibility lie two to six months on the horizon." But is Goldman right about that? Are all the rest of us wrong?

Let's go to the tape
Actually, I'm not so sure that Goldman is (right), or we are (wrong) -- and for several reasons. To begin with, there's the analyst's anemic record in automotive stocks to contend with. As I mentioned yesterday in addressing Goldman's Harley-Davidson (NYSE: HOG) upgrade:

Goldman has managed to lose investors a good 40 points worth of market underperformance on its recommendation. It hasn't done much better with its other automotive industry picks, either, outperforming the market by only 10 percentage points on Ford (recommended early last year), while under-performing by 19 points on Honda Motor (NYSE: HMC) (likewise.)

In light of this record, I think investors would be wise to take Goldman's recommendation of any additional automotive stocks with a few grains of salt. I mean, yes, A123 has a partner already, but Fisker? It's hardly an automotive giant. And while it's true that A123 is promising to identify a true "major North American automaker" partner soon, so far, it's keeping mum on that OEM's identity. So far as we know, both General Motors (NYSE: GM) and Ford have hitched their respective wagons to Korea's LG Chem. I suppose it's possible one of those heavyweights will switch sides, or that Chrysler might expand on its historical support of A123 … but it's also possible nothing will ever come of A123's promise.

Foolish final thoughts
As far as Goldman's other entries in the "pros" column for A123 go, the mere hiring of a CFO isn't much of a reason to buy a stock, in my book -- I'm really not sure why Goldman thinks that qualifies as a "catalyst" that could help move A123 63%. And the fact that A123 is in line for a government handout -- that just highlights for me the cash-consuming nature of A123's business.

Last year alone, the company burned through more than $133 million in negative free cash flow. ($273 million burnt over the past five years.) Then last month, we heard the company's looking to sell at least $125 million in debt and sell 18 million shares in an attempt to raise the cash necessary to keep the lights on and the doors open till it reaches profitability.

When you get right down to it, I simply don't see much reason to own an unprofitable, dilutive, and cash-burning "business" such as A123. Then again, I'm not underwriting its stock and debt offerings. Want to guess who is? That's right: Goldman Sachs.

General Motors is a Motley Fool Inside Valueselection. Ford Motor is a Motley Fool Stock Advisorpick. 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. 542 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.