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.

Is Verizon doomed?
Forgive the provocative question, but that's basically what the analysts at Hudson Square Research told us last week. They argued that a lack of 4G capability in Apple's (Nasdaq: AAPL) new iPhone 5 for Verizon (NYSE: VZ) would cause that stock to lag AT&T (NYSE: T) -- rendering AT&T a "buy," and Verizon a "sell."

I thought Hudson was perfectly wrong, and this week, I got some backup from the phone folks at Oppenheimer. In questioning Hudson's sell rating on Verizon, I cited the company's strong free cash flow, low price relative to that free cash flow, and massive 5.3% dividend yield as three good reasons to like the stock. Yesterday, Oppenheimer agreed with me on at least one of those points.

Cash is king
Oppenheimer argues that Verizon's "premiere wireline and wireless networks" businesses will earn $2.22 per share this year, then $2.55 next year. And these numbers appear to be conservative. Oppy's new 2011 prediction is no more than what the rest of Wall Street was already expecting, while the analyst's 2012 earnings estimate actually lands below the consensus number.

Furthermore, Verizon "has spent almost a decade spending substantially higher capex and is set to see very strong [free cash flow] growth going forward." Indeed, as "capex [trends] down" and "revenue growth [accelerates] to the mid-single digits," Oppy expects to see both EBITDA margins and free cash flow expand "due to operating leverage from its high quality FiOS and LTE networks."

As I mentioned last week, Verizon's already generating nearly four times as much free cash flow as it reports as "net income" under GAAP. It already costs as little as 7.4 times free cash flow. Grow that free cash flow much faster than the 6% growth rate Wall Street has the company pegged for, and Verizon won't be just a "buy." It'll be a screaming buy.

... with caveats
I'm so sure of Verizon's potential for outperformance that I'm going to recommend the stock to "outperform" the market on CAPS. (And if you agree, feel free to do likewise.) Still, it's worth pointing out that just because I say the stock will outperform, and just because Oppenheimer agrees, is not sufficient reason to expect Verizon will beat the market.

You see, while Oppenheimer has a longer track record of making telecom services picks than did Hudson Square ... it probably wishes it didn't. Fact is, Oppy's kinda spotty in the telecom arena, and actually gets about two picks wrong for every one it gets right:


Oppenheimer Rating

CAPS Rating
(out of 5)

Oppenheimer's Picks Beating (Lagging) S&P by

AT&T Outperform *** 6 points
City Telecom (H.K.) Outperform **** (18 points)
VimpelCom     Underperform **** (26 points)

To be fair, some of Oppenheimer's other winners in the industry (Consolidated Communications and Premiere Global Services, for example) have helped to balance the score. And yes, net-net, if you invested in each and every telco pick Oppy has made over the last four years, you'd still be beating the market. Just be aware that most of the analyst's picks don't outperform the market.

So why listen to Oppenheimer at all? Actually, maybe you shouldn't. But that's OK, because even if the analyst is wrong about its major assumptions -- that Verizon's capex will decline and growth accelerate -- the stock still looks attractive to me. I mean, 7 times free cash flow for a 6% grower paying a 5%-plus dividend? For a company that is, for all intents and purposes, one-half of a telecom duopoly in the U.S.?

You could do a lot worse.

Which stock do you think is the better bargain: Verizon or AT&T? Don't guess. Add 'em both to your Fool Watchlist and find out for sure.

The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of AT&T and Apple, and creating a bull call spread position in Apple.

Fool contributor Rich Smith does not own shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 454 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.