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

And speaking of the best …
Is China hot, or not? According to Wall Street megabanker Citigroup, it's not only hot -- it also offers one of the biggest turnaround stories of the year: Baidu.com (NASDAQ:BIDU).

Or so I surmise from yesterday's upgrade. As recently as Wednesday, you see, Citi was telling its clients to avoid Baidu like the plague. But bright and early Thursday morning, Citi turned on a dime and upgraded the shares all the way from "sell" to "buy."

Why?
Citi explained its abrupt about-face thusly: Baidu experienced a "rebound" in search traffic in February, and "has continued to improve weekly and has been stronger than expected, based on our latest channel checks." Citi implies that its earlier pessimism about the stock derived from the company's "weaker-than-expected 1Q guidance, implying a 20%+ QoQ decline." But recent developments have Citi believing that this guidance will now be exceeded, "thus creating a near-term positive catalyst which was lacking previously."

But is Citi as right this time as it has been wrong in the past about the stock?

Let's go to the tape
After all, according to our CAPS records, Citi has publicly recommended buying or selling Baidu stock three times in the past two years, for a combined return of (drum roll, please) ... 13 percentage points' worth of underperformance of the S&P 500. (However, there appears to be a sell rating sometime after April 2008 that was not picked up by our data provider and is thus not reported in CAPS.)

Overall, Citi's record on China stocks looks little better than a coin flip. The banker has picked a few winners ...

... and a few losers, as well:

SINA's total score is a combination of two separate closed calls on the company.

The result? In China as elsewhere, this banker continues to get roughly the same number of picks right as it gets wrong -- a hair more than 50%.

Buy, buy Baidu?
Now, I know Citigroup's not the most popular stock these days. But while you can fault the company, and fault the asset-backed security traders who got it in the fix it's in today, I have to say that I'm feeling pretty good about the equity research side of Citi right now -- and its recommendation of Baidu in particular.

Whether you believe the analyst's short-term prediction that Baidu will "beat earnings" in Q1 or not, the fact remains that, 60% off its 52-week high, Baidu's stock currently offers a very nice entry point for long-term investors. You see, last year, Baidu generated some $175.6 million in free cash flow. That's up 250% from the company's fiscal 2007 performance, and while such a growth rate is certainly unsustainable, analysts believe that the company will be able to average 34% growth over at least the next five years.

What all this works out to, Fools, is a company trading for 30 times annual cash flow, expected to grow faster than 30%, and loaded up with about $390 million in net cash (with no long-term debt). To me, that looks like a pretty compelling valuation -- if the growth rate materializes.

Citigroup seems to think it will. Me, I've just got my fingers crossed.