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." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.

But in "This Just In," we don't simply tell you what the analysts said. We'll 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'll be tracking the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

And speaking of the best ...
Shares of semiconductor-equipment maker Applied Materials (NASDAQ:AMAT) soared today in the wake of back-to-back upgrades from two of Wall Street's marquee names. Just this morning, first Citigroup upgraded the stock to "buy," and then JPMorgan chimed in with an equivalent "overweight" rating. The analysts cited two reasons for their optimism:

• First and foremost, the 21% stumble the stock has taken over the past month, to create what JPMorgan called "a major buying opportunity."
• Second, the belief that investors are underestimating Applied Materials' ability to profit from the solar-power boom, now that the company owns a key component of this industry in the form of its recently purchased Applied Films.

With the stock selling for less than 15 times trailing earnings pre-upgrades, the first argument seems self-evident. And as for the solar thesis, I've been thinking along these same lines for more than a year now. But what do I know -- and more importantly, what do these two professional investors know about the high-tech industry?

Let's go to the tape
Excellent questions, both. For the answers, we turn once more to the Web pages of Motley Fool CAPS to examine everyone's records. Mine is here, but what about Citigroup and JPMorgan, whose picks we track in CAPS? Well, a sampling of Citi's record looks a bit like this:

Nice performance on solar plays, less impressive on more ordinary semiconductors. Also interesting is that the picks of SunPower and Suntech are the top two active performers in Citi's CAPS portfolio, helping to earn the banker a top-10% CAPS rating of 93.88, with 55% accuracy.

In contrast, JPMorgan lacks much of a track record in solar power. It's doing a pretty decent job with more run-of-the-mill semiconductors, however:

Still, missing out on the solar boom has helped to make JPMorgan a relative underperformer compared to its big Citi rival. JP gets just a respectable 86.06 CAPS rating, on accuracy that verges on coin flippery -- just a hair above 50%.

Foolish takeaway
So in general, what we have here is one proven solar-powered wunderkind backing Applied Materials' solar prospects, and one less-tested analyst tagging along. Will they both be proven right?

I think so. Applied Materials' stock price seems more than fair to me today, even after the post-double-upgrade run-up. The price-to-earnings ratio now sits at a below-market-rate 16, and the average prediction of analysts covering the company calls for 16% annual profit growth over the next half-decade. Moreover, because Applied Materials generates significantly more free cash flow than it reports as net income, it sports a price-to-free cash flow ratio of just 14 -- so it's even cheaper than it appears on the surface.

Put it all together, and I agree wholeheartedly with the professionals on this one. AMAT's a buy.

Disagree? Feel free. Just do us a favor and drop by Motley Fool CAPS to tell us why. And while you're at it, check out our buy thesis on one of Citi's favorite stocks, Suntech, which was recommended in Motley Fool Rule Breakers nearly a year and a half -- not to mention a two-bagger -- ago. Just like playing CAPS, trying out Rule Breakers is free of charge.