This Just In: More 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." While the pinstripe-and-wingtip crowd is entitled to its opinions, down here on Main Street, we've got some pretty sharp stock pickers, too.

Given that, perhaps we shouldn't be giving virtual ink to "news" of analyst upgrades and downgrades. And we wouldn't -- if that were all we were doing. Fortunately, in "This Just In," we don't simply tell you what the analysts said. We 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 …
By any standard imaginable, the stock looks horribly overpriced. Yet Wall Street keeps urging you to buy it. In such a situation, do you question your sanity -- or at least your assumptions? I'm doing exactly that today, in the wake of the second consecutive Street endorsement in as many days for Green Mountain Coffee Roasters (Nasdaq: GMCR).

The first came from the smart stock pickers at Canaccord Genuity on Monday. Citing newspaper reports that Starbucks (Nasdaq: SBUX) has begun working up a new "single-serve" coffee machine product for home brewing, and noting that the company may seek a new retail partner after its agreement with Kraft (NYSE: KFT) expires on March 1, Canaccord argued that Starbucks must logically join up with Green Mountain and begin producing Starbucks pods for Keurig brewers. Canaccord calls such an alliance a "significant positive" for Green Mountain, and reiterated its belief that the company has "several years of rapid growth before household penetration rates of single-cup coffee brewing begin to mature." Based on this, Canaccord mused that 32 times pro forma earnings seems "reasonable," and slapped a $50 price target on Green Mountain.

Today, KeyBanc Capital agrees. Like Canaccord, KeyBanc extols "the potential for additional brewer and pod/k-cup sales as a result of a partnership with Starbucks" and tells investors to look for 41% annual earnings growth at Green Mountain over the next three years.

Let's go to the tape
This isn't a "me-too" upgrade by any means. However good Canaccord may be, KeyBanc actually ranks as one of "Wall Street's Best" stockpickers, according to our CAPS stats. In the face of two such stellar stock pickers, why do I remain unconvinced?

For starters, both Canaccord and KeyBanc achieved their greatness in spite of their demonstrated inability to accurately call the fortunes of restaurant stocks. Over the four years we've been covering its recommendations, Canaccord has managed just 33% accuracy on its recs in the Hotels, Restaurants and Leisure industry. Its sole win has been Chinese Internet vacation site Ctrip.com, which stands in stark contrast to Canaccord's 24-percentage-point loss to the market on actual restaurateur Jamba (Nasdaq: JMBA). For its part, KeyBanc's record in restaurants only slightly better:

When it comes to restaurants, even KeyBanc has a hard time picking winners. Its overall record in the industry is 50%, no better than a coin flip.

That's why I stubbornly insist that the Main Street investors on CAPS who've rated Green Mountain a one-star stock are right -- and Wall Street is dead wrong.

As you may recall, I took a good, hard look at Green Mountain last week. As the stock hit a new 52-week high, I asked why a stock that's done so well is nonetheless so universally scorned by our 170,000 (and counting) CAPS investors:

Over the past 12 months, the company reported $72 million in "profits" -- but only collected $21 million in cash flow. After deducting $142 million spent on necessary capital investments, Green Mountain ended up burning more than $120 million for the year. … In order to keep its revenue and (illusory) profits growing, Green Mountain also had to spend $1.2 billion buying new businesses, adding their revenue and (still illusory) profits to its own. That's 10 times the amount of Green Mountain's already negative free cash flow.

Foolish final thought
Sure, Wall Street could be right about Green Mountain. CAPS could be wrong. Still, it seems to me that Green Mountain's spectacular rise in revenue owes less to the success of the single-cup concept, and more to the company's caffeine-fueled buying spree of its competitors -- at sky-high prices. The moat surrounding Green Mountain's one-cup coffee brewing market seems awfully thin.

Honestly, any Fool with a spoon and a 10-cup autodrip -- or a kettle and a simple French press -- can quickly and easily make a single cup of coffee. And if Green Mountain's "business advantage" can be defeated by the use of a simple kitchen utensil, well, stick a fork in Green Mountain, folks. It's done.