This Just In: Upgrades and Downgrades

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." While the pinstripe-and-wingtip crowd is entitled to its opinions, down here on Main Street, we've got some pretty sharp stock pickers, too. (And we're not always impressed with how Wall Street does its job.)

Given that, perhaps we shouldn't be giving virtual ink to "news" of analyst upgrades and downgrades. And we wouldn't -- if that were all we were doing. Fortunately, in "This Just In," we don't simply tell you what the analysts said. We also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

Today, we're looking at a stock that gets plenty of love -- right along with a downgrade. What gives?

Cirrus Logic: Music to your ears?
The stock under the microscope is audio chip designer Cirrus Logic (Nasdaq: CRUS). Analyst firm Oppenheimer just downgraded the stock from a "buy" to a "hold," but pours buckets of love over Cirrus all the same.

You simply don't see language like this in most downgrade notes:

Cirrus remains one of the best pure plays on the growth and success of Apple (Nasdaq: AAPL). We continue to expect Cirrus to retain its sole-source position with Apple through at least 2012 while enjoying material content increase in upcoming devices. We believe [the June-ended quarter] is tracking in-line and that [the September-ended quarter] could grow 30%-plus [quarter-over-quarter].

If the company's near-term future looks so bright, why the glum rating? There's an explanation for that. Oppenheimer notes that shares have soared 88% year-to-date, leaving little room for further "upside surprises" at this point. "We believe risk/reward is balanced and are moving to the sidelines," the firm says.

Before digging into the value of these statements, let's have a look at Oppenheimer's track record. In our CAPS system, the firm carries a middling score of 66 out of 100. It gets about 44% of its ratings calls right -- but only 26% in the semiconductor segment.

In that sector, Oppenheimer has scored huge with a long-term call on Skyworks Solutions, but lost it all and then some on a bucketful of mistaken calls. Here's a sample of Oppenheimer's extremes:

In all fairness, FormFactor has been a fairly steady five-star CAPS stock (out of five) even as share prices fell 40% over the last two years. This stock has hurt its fair share of CAPS portfolios (my own included), and still holds a terrific 98% approval from our All-Star players. And Oppenheimer may have lost big on ReneSola, but has shown some tremendous gains elsewhere in the solar power field. The firm snagged a 148-point gain on JinkoSolar during four hectic months in 2012 -- and correctly closed out that position, which has lost 88% of its value since then.

So maybe Oppenheimer's terrible score is just a temporary slump after all. Bad things happen to good stock pickers every day, after all.

What about this Cirrus call, then?
Oppenheimer's analysis of Cirrus makes sense on the face of it. I agree with everything the firm said about Cirrus' plum position in Apple's supplier universe, and the management team already told us to expect a sharp revenue jump in the September-ended quarter.

But we disagree on the fundamental question of valuation. That 88% gain seriously doesn't put a cap on further gains. After all, Cirrus shares trade for just 22 times trailing and 13 times forward earnings even today. As long as the Apple relationship doesn't turn sour overnight, this stock is still primed for tremendous gains. Furthermore, all of this value comes from the audio chip portfolio. You basically get Cirrus' power controllers for free, including the LED lighting controllers that are set to make meaningful contributions in 2013 and beyond.

The Foolish takeaway
All told, Oppenheimer's "hold" might be right in the short term -- for active traders. Long-term investors like most of us Fools, however, should still feel comfortable buying here.

As always, true Fools need to supplement any investment thesis with their own homework. Cirrus gets a thumbs-up rating from 96% of the CAPS members who have weighed in, and has scored 180 points for my own CAPS portfolio. Did Oppenheimer just change your opinion on this stock, one way or the other? Jump over to CAPS and make your opinion known right now.

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