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 ...
"One man's trash is another man's treasure," the old saying goes. Even if Yahoo! (Nasdaq: YHOO) shares have been acting pretty trash-like recently -- underperforming the market by nearly 20 percentage points over the past year -- they've been absolutely golden for the analysts at Needham & Co.

Over the past five years, Needham has recommended buying Yahoo! three times. And Yahoo!'s long slide into irrelevancy notwithstanding, Needham has outperformed the market by a combined 36 percentage picks on this stock, picking and choosing its entry points for maximum gain. 

That's why it's such a pity to see how Needham's about to blow its record with a massive belly flop on today's pick.

Bad move, guys
This morning, Needham went back to the well on its perennial outperforming pick, recommending that investors buy Yahoo! for two key reasons. First, Needham argues that Yahoo! is "the premium content company for the Internet age," boasting "some of the best content on the Internet with 12 No. 1 online content sites in the U.S. and 9 of the top 10 original video programs on the Web."

Second, Needham asserts that the shares are undervalued, largely because the share price does not reflect the value of Yahoo!'s assets. According to the analyst, Yahoo!'s stakes in Yahoo! Japan, Alibaba Group, and Alibaba.com are worth $6 a share. Throw in $2 worth of cash-per-share, and rump-Yahoo! is currently selling for a mere $7 or so.

Now let me tell you why that argument is totally bogus.

Yahoo!... Boo?
First up, the business argument. According to Needham, Yahoo!'s "premium content ... aggregates audiences that can be monetized via advertising, commerce and subscription services." Valid points, and I wouldn't disagree. But the key to this buy thesis is the operative word "can." Can be monetized. Can be worth something. Not will. Not have been.

But the problem with Yahoo! has never been the quality of its assets. Everyone knows they're great. To cite just one example, I use Yahoo! Finance several times a day in my investing work. I use its news feeds to keep me up to date on happenings at all of my holdings. If Yahoo! Finance disappeared tomorrow, I'd be lost. While Microsoft (Nasdaq: MSFT), Google (Nasdaq: GOOG), and AOL (NYSE: AOL) have all developed credible alternatives to Yahoo! Finance, and companies like Bankrate (Nasdaq: RATE) and even Nasdaq OMX (Nasdaq: NDAQ) have rich and useful content on their sites, none of them offers the ease of use and familiar feel of Yahoo.

No, the problem with Yahoo! lies in the promised "monetization" of its content. With only $1.1 billion in GAAP profits to its credit, Yahoo! currently trades at a rich 17.5 times multiple to earnings. Its anemic free cash flow -- less than half reported income -- yields an even more nosebleed price-to-free cash flow valuation of 36 times. That's three times as high as the company's 12% projected growth rate, and way, way more than the stock is worth at its current level of performance.

As for me, I say that any way you look at it, Yahoo!'s not living up to its potential. It's got great Internet real estate Stateside -- but it's had it for years, and still hasn't found a good way to make money off it. It's got loads of assets abroad, but it's frittering those away, too.

So does Needham's argument make you want to own the stock? Me, neither.

Fool contributor Rich Smith owns shares of Google, but he holds no other position in any company mentioned. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 534 out of more than 170,000 members. Click here to see his holdings and a short bio. The Motley Fool has a disclosure policy.

The Motley Fool owns shares of Microsoft, Google, and Yahoo!. Motley Fool newsletter services have recommended buying shares of Google, Yahoo!, and Microsoft, and have recommended creating a diagonal call position in Microsoft. Try any of our Foolish newsletter services free for 30 days.

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