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." Here, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.

Intelligent investor
Shareholders of Motley Fool Rule Breakers recommendation Interactive Intelligence (Nasdaq: ININ) received a good bit of "intel" of their own yesterday. Turns out, we're not the only folks who are up on the prospects for this Indianapolis-based software provider. On Tuesday, the Wall Street wizards at Dougherty & Co. gave II a vote of confidence as well.

Praising II's "all-in-one software solution that enables contact center agents and supervisors to handle both inbound customer interactions across various channels and outbound marketing campaigns," Dougherty cited a recent Gartner report projecting 15% long-term growth in this industry. While admitting the company faces competition from more established players such as Cisco (Nasdaq: CSCO) and Avaya, Dougherty believes II will "be a continued beneficiary of the ongoing call center/enterprise telephony transformation." So strong is Dougherty's belief, in fact, that it is now recommending its clients buy shares of II, arguing that its products are more "cost-effective and more flexible, and hence ... superior to other current market offering."

Superior to Cisco?
But will coding a better mousetrap be enough of an advantage to lift II into the ranks of stock market outperformers? Or might one of II's rivals simply stomp on its mousetrap, and crush the company before it can reach critical mass? As if it weren't bad enough that (as StreetInsider.com reports) II has to compete with the likes of Cisco and Avaya, II itself names several other rivals, equally fearsome, to worry about: Franco-Yank giant Alcatel-Lucent (NYSE: ALU), for example, and IBM (NYSE: IBM), Oracle, and Siemens to boot. What chance, really, does an investor have to make a profit on this stock when it's playing on a field dominated by giants?

Performance matters ...
Now, don't get me wrong -- I'm rooting for II to succeed. As a resident of Indianapolis, I kind of have to, and, of course, knowing that II is a Rule Breakers rec (and that our average recommendation outperforms the market by some 60 percentage points over its lifetime), I recognize that some odds are stacked in II's favor.

But this doesn't change the fact that Dougherty doesn't have a particularly shiny reputation for picking winners in the software space. Referring to its record on CAPS, where we've been tracking Dougherty for some years now, what we see is that while Dougherty spends the bulk of its time making software recommendations, it guesses wrong significantly more often than right in this industry. (In fact, only 35% of Dougherty's software recs ultimately go on to beat the market.)

... and so does valuation
As disheartening as that record is, the price point at which Dougherty has chosen to recommend II worries me even more. Consider: Over the past couple years, in the face of fierce competition, II has managed to nearly double its operating cash flow production, all the while holding capital expenditures in check.

That's good. And yet, even with more than $23 million in annual free cash flow to its credit, and a balance sheet brimming with cash, II's stock looks frighteningly expensive to me at a price-to-free cash flow ratio of more than 31, and long-term growth projected at 19% per annum. When you consider furthermore than analyst estimates for this company have more often overshot the mark than undershot it, and that II has missed consensus projections twice in the past four quarters, I suspect even the "19% growth" number may be overoptimistic.

Foolish takeaway
Hometown loyalty aside, and respect for the record of the stock pickers at Rule Breakers notwithstanding, I do not see a big enough margin of safety in II's share price today to justify taking a gamble on this one. Add to the mix Dougherty's sad record of backing losers in the software space, and my best advice to you today ... is to stay away. II may be a great company, but at today's stock price there are better bargains out there, and with significantly less risk attached to them.

Fool contributor Rich Smith does not own (nor is he short) shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 570 out of more than 170,000 members. The Motley Fool has a disclosure policy.

Interactive Intelligence is a Motley Fool Rule Breakers choice. The Fool has created a bull call spread position on Cisco Systems. The Fool owns shares of International Business Machines and Oracle. Motley Fool Alpha LLC owns shares of Cisco Systems.

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