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'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 ...
In software, there's Oracle (Nasdaq: ORCL), and then there's everybody else. Among major software vendors, Oracle has one of the highest operating margins available, beating out salesforce.com (NYSE: CRM), IBM (NYSE: IBM), and SAP (NYSE: SAP). It loses only to Microsoft (Nasdaq: MSFT).

On sales growth, it's the unchallenged king of the ring, with a revenue stream that swelled 37% last quarter, eclipsing its nearest rival, salesforce, by 790 basis points. So it's little wonder that, after poking around for a software maker to recommend this morning, ace equities analyst ThinkEquity came away with one firm conviction: Oracle is a buy.

According to ThinkEquity, Wall Street is actually underestimating how strong this company's operating leverage could become. Though Oracle's stock price has slipped 10% from its highs of mid-May, ThinkEquity believes the company could be readying itself for another leap in profitability.

Still, if things are as good as this analyst suggests, why is Oracle's stock hardly reacting at all to its upgrade morning?

Let's go to the tape
ThinkEquity is a terrific analyst in most respects, easily outperforming better than 90% of the investors we track on CAPS. But when it comes to software, the analyst hasn't done quite so well.

Just one software pick out of the four that ThinkEquity has made in the past two-plus years -- Manhattan Associates (Nasdaq: MANH) -- has managed to outperform the market:

Company

ThinkEquity Rating

CAPS Rating
(out of 5)

ThinkEquity's Picks Lagging S&P by

Electronic Arts Outperform ** 39 points
Shanda Interactive Outperform *** 67 points
The9 Limited Outperform *** 119 points

So I'd certainly understand if investors want to take today's Oracle recommendation with a grain of salt, and hesitate to push the "buy" button on ThinkEquity's say-so. I'd understand ... but I wouldn't agree.

Predicting the future at Oracle
There's no denying that ThinkEquity lacks a particularly ThinkEnviable track record on software stocks. I get that. If you're thinking that Oracle has to live up to this analyst's expectations, overtake Microsoft, and expand its 34.4% operating margin even further to be worthy of an investment, then yes, maybe ThinkEquity is wrong about that. But even if the analyst is wrong about Oracle's improving its profit margins, it's still right that the stock is a buy.

At nearly 22 times earnings, the stock doesn't look obviously cheap. But as Oracle's cash flow statement reveals, this company is actually much more profitable than meets the eye. The $9.5 billion in free cash flow it generated over the last 12 months outstrips reported GAAP income by 23%, giving the stock a 17.6 price-to-free cash flow ratio. Paired with a modest 0.7% dividend yield, and consensus growth rates of 15.2% for the next five years, the worst I can say about Oracle today is that it might be slightly overpriced.

But if ThinkEquity is only slightly right about the potential for improvement in profit margins, this should be enough to tip the balance in Oracle's favor. Add in the nearly $10 billion in net cash on the company's balance sheet, and I think the odds are pretty good that ThinkEquity is right about Oracle.

The Motley Fool owns shares of International Business Machines, Oracle, and Microsoft. Certain Motley Fool newsletter services have recommended buying shares of Salesforce.com and Microsoft; others have recommended creating a diagonal call position in Microsoft, and even shorting Salesforce.com.

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. 478 out of more than 170,000 members. Fools don't always 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.