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 ...
What do you do when one of the best stock pickers on the planet, according to CAPS, suddenly initiates coverage on four of the hottest stocks on the market? I don't know about you, but I listen up. And from what I hear, Stifel Nicolaus thinks now's the time to invest in NYSE Euronext (NYSE: NYX) and InterContinentalExchange (NYSE: ICE), both of which it initiated at "buy" yesterday. Of the two, NYSE got by far the warmer reaction on Wall Street, with shares soaring by nearly 6% on Stifel's upgrade. In contrast, ICE got a chillier reception, rising by only 1.4%.

Stifel also launched coverage of Nasdaq OMX (Nasdaq: NDAQ) and CME Group (NYSE: CME), by the way -- but it told investors these two stocks are worth holding. Consequently, Mr. Market's reaction was more muted on these two: CME booked a fraction-of-a-percent decline; Nasdaq, a fraction-of-a-percent rise.

A logical reaction to the new ratings? Perhaps. But here's the part that may surprise you: I disagree with Stifel strenuously on these calls -- and with investors' reactions to them as well.

Let's go to the tape
I admit that contradicting Stifel's calls carries risk. Stifel scores in the top 3% of investors we track on CAPS and boasts 59% for accuracy on its picks marketwide. And Stifel does really well in the capital markets sector, where it's booked big wins with stocks such as these:

Impressed?

So am I. Yet when I look at the numbers underlying the four stocks that Stifel began covering this week, I can't help believing that Stifel's gonna stumble over these latest picks:

Relative to their growth prospects, none of these stocks -- not NYSE or ICE, which Stifel likes, nor Nasdaq and CME, which it doesn't -- looks particularly attractively priced today. Dig a little deeper and examine the companies' relative abilities to generate free cash flow, and the picture changes a bit, of course , but to my Foolish eye, it does so in a way that undermines both Stifel's optimistic prognoses and suggests that investors are reacting all wrong to the new ratings.

Take NYSE, for example -- one of Stifel's faves, and the stock that reacted strongest to the "buy" rating. The company sports the highest PEG ratio of the bunch, and far from seeing its case bolstered when we examine the cash-flow statement, we find that it's burning cash. That's hardly a promising development. In contrast, ICE's trailing free cash flow of $462 million was nearly 50% greater than its reported income under GAAP last year. In fact, I'd argue that with its price-to-free cash flow ratio of 17, the stock looks to be fairly priced given its growth prospects.

Hold Nasdaq? Au contraire.
Best of all, though, is Nasdaq, which got only a shrug of the shoulders from Stifel, and almost no reaction from investors. The company generated twice as much free cash flow as reported income last year, for a very nice price-to-free cash flow ratio of just 8.7.

So there you have it, folks. Nasdaq, which Stifel sees as only a "hold," is the best bargain of this bunch, in my opinion. But the best news of all is that, thanks to Stifel's skepticism, its price has changed hardly at all in reaction to the new coverage, so it remains as much of a steal today as it was last week.

But not for long.