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 ...
Investment banker Jefferies & Co. delivered a dose of holiday cheer yesterday to investors in the notoriously lumpy earner American Science & Engineering (NASDAQ:ASEI). Where others see only a 16% rise in operating costs year to date (versus the first half of 2006), Jefferies sees an "investment in the sales force." On the flip side, where others praise AS&E for growing its sales 38% over the same time frame, Jefferies sees even more sales to come, helped in part by the new salesmen, and in part by "recent new product introductions."

Citing demand for the company's Gemini parcel-inspection system, and positing a potential $75 million order from the U.S. Navy, Jefferies upgraded AS&E shares from "hold" to "buy." According to Reuters, that makes Jefferies the sole professional analyst voting in support of the stock. But how much is that vote worth?

Let's go to the tape
For clues to whether Jefferies' opinion matters, we turn to Motley Fool CAPS for a glimpse at the banker's record. What we find is that, while no longer one of Wall Street's literal "Best," Jefferies retains a high rank in CAPS-land. Despite a record of being wrong nearly as much as it's right (53% accuracy), Jefferies does well enough on the occasions when it is right to win a place in the top 10% of stock pickers.

What picks might those be, you ask? Picks such as these:

Meanwhile, the 47% of recommendations pushing Jefferies out of the ranks of Wall Street's Best include:

Seeing clearly
I have to say I agree with Jefferies on this one -- as an AS&E shareholder myself, I probably should. The company's 38% growth in sales compares really well with just 16% growth in operating costs. It looks even better when you break down that operating-costs growth and see that investment in research-and-development activities has outpaced sales growth so far this year, at 51%. Meanwhile, "overhead" spending for selling, general, and administrative purposes has risen by a scant 7%. Very good trends, indeed. However, I'm a bit less enthusiastic about the company's cash-flow situation -- so far this year, rising inventories have put AS&E in negative territory for cash profits. Cost-of-goods growth is outpacing revenue growth 56% to 38% year to date, and there's a corresponding fall in gross margin to 38% from 45% in the year-ago period. Something to keep an eye on, Fool.

I do find it encouraging that one of the recommendations on Jefferies' "win" list above -- OSI Systems -- is a major AS&E competitor. Logically, if the analyst has a good grasp of OSI's business, Jefferies should have a similarly good grasp of AS&E's position in the security market. Still, optimism and a 53%-accurate analyst's say-so gets you only so far. Until I see improvement in AS&E's free cash flow and, possibly, inventory management, I won't be buying any additional shares.