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 track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

And speaking of the best ...
As the week's trading drew to a close last week, one analyst boldly shouted: "Hold up a sec -- I'm not finished." And so it was that on Friday, Broadpoint AmTech assumed coverage on two stocks that had, till now, apparently escaped its notice. Which is understandable, because ...

... who's ever heard of Google (NASDAQ:GOOG) and Yahoo! (NASDAQ:YHOO)?

AmTech, meet hi-tech
I jest, of course. The company had previously covered both stocks before their recent "buy rating." As the name suggests, Broadpoint AmTech (emphasis added) has a special affinity for tech stocks. What's more, with its record of beating the market's returns by two percentage points per recommendation, it seems AmTech's pretty good at picking 'em ...

... most of the time. Like all of us, AmTech does make mistakes:

Over the course of the two-plus years we've been tracking the analyst, Broadpoint AmTech has proven itself capable of picking winners a bit less than half the time -- 46% to be precise. And based on what I see in Friday's recommendations, I expect we'll see these two picks split down the middle as well. Here's why:

Google
Selling for a 30 P/E, with "only" 19% long-term growth expected of it by the Street, Google is hardly a no-brainer. But the company generates so much more free cash flow than GAAP rules allow it to report as "earnings" that its true value is obscured. Net out Google's sizeable cash stash, and the stock's selling for an enterprise value-to-free cash flow ratio of just 17.

AmTech calls Google a "must-own" stock, and thinks it's going to $480-a-share within the year.

The analyst believes Google to be "well-positioned to benefit from the continuing increase in global access to more and more digital information ... Google's core text-based advertising business will continue to grow, is defensible, and has very high structural operating margins of between 60% and 80%". I agree. At this price, and with these opportunities, Google's a buy.

Yahoo!
Not so with Yahoo -- and you can hear AmTech's own self-doubt about this one right there in the buy thesis:

What has been lost in all of the discussion around potential deals, Facebook and Twitter's growth, and Google's dominance in search is that [Yahoo] remains one of the most widely used sites in the world. If it can maintain its relevance ... there is a good shot that the company can retain some of its past glory. The key will be ... what has long been [Yahoo's] Achilles' heel: execution. The opportunity is [Yahoo's] to lose. (emphasis added)

To AmTech's own hemming and hawing over the stock, I'd only add that the price isn't all that attractive either. Without substantive profits over the past 12 months, Yahoo! has no meaningful P/E. And while the firm is in fact profitable on a cash basis, its $750 million in trailing free cash flow leaves the enterprise value trading for 24 times cash flow. To my mind, that's way too high for a 16% grower.

Foolish takeaway
Will Yahoo! be able to turn itself around? Your guess is as good as AmTech's. But until the price drops far enough to reflect the uncertainties, I cannot see that stock as anything more than a "hold." In contrast -- and regardless of what Yahoo! does -- AmTech is right on the money in predicting that Google will continue to dominate the Internet. Tack on a terrific stock price, and Google's the long-term winner here.