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 Wynn a loser?
Shares of casino operator Wynn Resorts (Nasdaq: WYNN) have been a shining light in a dreary market this year. As the Dow Jones Industrial Average (INDEX: ^DJI) has basically played possum, posting nil-to-nearly nil growth year to date, Wynn shares are up a tidy 10%. But according to one analyst, it's time for Wynn investors to take their chips off the table, count themselves lucky to have made any profit at all, and call it a year.

Yesterday, the analysts at Janney Capital Management downgraded Wynn on fears that growth is slowing in the company's key Macau market, while costs in the Cotai district of Macau in particular look likely to spike. That's curious, when you consider that in Macau as a whole, Janney still expects to see revenues climb 40% by year end, with a further 20% rise in revenues expected next year. Problem is, Janney sees Wynn rivals like MGM Resorts (NYSE: MGM) and Melco Crown Entertainment (Nasdaq: MPEL), and even more particularly Las Vegas Sands (NYSE: LVS) and Galaxy, reaping the bulk of this growth. Wynn, says the analyst, will be lucky if it grows adjusted earnings even 12% next year.

Let's go to the tape
There's just one thing wrong with Janney's downgrade, though: the analyst itself. You see, Janney's pretty active in the hotel, restaurant, and leisure industry, having made 13 separate picks here over the past three years. The problem is that Janney's not a very good stock picker.

So far, just three of the analyst's recommendations in this industry are beating the market -- and two of these aren't resorts at all, but rather fast-food purveyors McDonald's and Burger King. When it comes to picking gambling stocks, Janney's had less luck:


Janney Rating

CAPS Rating
(out of 5)

Janney's Picks Lagging S&P by

MGM Underperform ** 37 points
Gaylord Entertainment (NYSE: GET) Outperform * 18 points
Ameristar Casinos (Nasdaq: ASCA) Outperform * 2 points

Source: Motley Fool CAPS.

Hardly a spotless record, I think you'll agree. But what about Wynn? Could Janney be right about this one?

Valuation matters
I don't think so, and I'll tell you why: Right now, Wynn shares cost about 26 times earnings. That's pretty expensive if all the company can manage is the 12% earnings growth that Janney predicts for it -- but most analysts expect more from Wynn. Much more.

In fact, the consensus of the two dozen analysts following Wynn is that it will grow its earnings by an average of 58% per year over the next five years -- a rate faster than any of Melco, MGM, or Las Vegas Sands. If you ask me, Wynn would be a bargain if it grows only half that fast.

And Wynn could be an even bigger bargain that it looks. Consider: Over the past 12 months, Wynn generated $1.4 billion in free cash flow from its business. That's nearly as much cash as Melco, MGM, and Las Vegas collected combined. It's also more than two and a half times what Wynn reports as its net income under GAAP, and it's enough to give the stock an ultra-low price-to-free cash flow ratio of just 10.

Foolish takeaway
Years of investing have taught me that when a number looks too good to be true, it probably is. Accordingly, I'll tell you straight out that I think Wynn's projected 58% growth rate is probably bunk. Same thing goes for the 39% growth rate at MGM, the 53% projection for Las Vegas Sands, and the 56% annualized growth Melco Crown is pegged to produce. But that's beside the point.

The point is that at a valuation of just 10 times free cash flow, Wynn doesn't have to even come close to meeting expectations to be a buy. It can miss that 58% growth target by a mile and still be a bargain. In fact, I think it is a bargain.

And I'll put my reputation where my mouth is by recommending this stock publicly on Motley Fool CAPS. Care to bet against me? Visit CAPS today and rate Wynn Resorts an "underperform." Betcha lose.

Fool contributor Rich Smith owns none of the stocks mentioned here. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 311 out of more than 180,000 members.

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