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 ...
No sooner had Bankrate (NASDAQ:RATE) received its buyout offer from Apax Partners yesterday, than Wall Street began arguing over the prospects. Two analysts have just come out with downgrades on the stock, but while the direction of their interest aligns, the conclusions do not (necessarily).

On the bearish end of the scale stands ThinkEquity, which this morning downgraded Bankrate to "source of funds." If the term sounds confusing, well ... it's meant to. But here's a clue: How do you raise funds? (Answer: "By selling Bankrate.") Slightly more optimistic is Stifel Nicolaus, which, like ThinkEquity, had been recommending that investors buy Bankrate up until yesterday's surprise announcement. After reviewing Apax Partners' offer, Stifel is recommending that investors continue to hold the stock.

Why? We'll get to that in a moment. First, let's review how clever each of these analysts has proven itself to be, based on past performance. ThinkEquity first:

Impressed? I sure am. But as good as this excerpt from ThinkEquity's record looks, the overall record is better still. Fully 80% of this analyst's recommendations in the Internet Software and Services sphere outperform the market. It's going to be hard for Stifel to beat that ...

... and yet it does. As of this writing, all 10 of Stifel's recommendations in this industry are outperforming the market -- a perfect score. Clearly, Stifel's skill in picking Internet stocks is a key factor in why this banker ranks among Wall Street's Best.

What's a Fool to do?
That's one key reason why I believe Stifel has the better advice on what to do with Bankrate today. Now remember, neither analyst thinks you should buy the shares today, and for obvious reasons. Apax Partners has offered to pay shareholders $28.50 per share. But the stock is selling for more than that. Anyone buying today is gambling on a second bidder emerging and offering more than Apax has, which might seem unlikely given that Bankrate:

• Just released a downbeat earnings warning on its second-quarter results.
• Endorsed Apax's bid as an "attractive value," and Bankrate's board of directors "unanimously approved the transaction."

Given this state of affairs, ThinkEquity says you should take the money and run; sell now at a premium to what others will receive once this deal finalizes. In contrast, Stifel must believe there's still hope for a higher bid emerging, whether from Apax or from a third party.

This Fool agrees
I'm with Stifel on this one. Last month, I added Bankrate to both my CAPS portfolio and my real-life portfolio (i.e. I own the stock). As I argued in my CAPS write-up:

$42M in FCF x 19.5% long-term growth gives [me] a back o' the envelope valuation of $820M or so on Bankrate. Accurate? Almost certainly not. But with the company trading for an enterprise value south of $460M, I've got a good-size margin of safety to work with. I'll check back in on this one after it's up 50 points.

Foolish takeaway
Suffice it to say that after Apax's bid, Bankrate is now up just 8% in price. A far cry from what I believe it is worth. In my opinion, and I believe in Stifel's as well, there's a good chance someone else out there in Investing-Land will recognize the value in this company and make a better bid than Apax already has.

My advice: Hold the shares until that happens. That's what I'm doing.