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 stockpickers on the planet makes what seems a patently crazy call on a company you own? Personally, I'd listen up. And from what I hear, Brean Murray is saying it's time to take some profits on the GigaMedia (NASDAQ:GIGM) trade.

And why? Now that's the question.

Let's go to the tape
Before we get into the specifics of Friday's downgrade, though, let's take a quick look at the record of the banker making this call. With a record of better than 56% accuracy on its recommendations, Brean Murray outperforms 94% of all the investors we track on CAPS. Some of its picks do better ...

Stock

Brean Murray Says

CAPS Says

Brean Murray's Pick Beating S&P By

Shanda Interactive  (NASDAQ:SNDA)

Outperform

***

258 points

Netease.com  (NASDAQ:NTES)

Outperform

****

138 points

New Oriental Education  (NYSE:EDU)

Outperform

**

60 points

... than others ...

Stock

Brean Murray Says

CAPS Says

Brean Murray's Pick Lagging S&P By

CDC (NASDAQ:CHINA)

Outperform

****

45 points

Shengdatech (NASDAQ:SDTH)

Outperform

*****

20 points

China Security & Surveillance Technology  (NYSE:CSR)

Outperform

*****

18 points

But on average, any given pick Brean Murray makes goes on to outperform the S&P 500 by more than five full percentage points. And as you can tell from the above examples, this analyst also seems to have a predilection for:

  • Picking Chinese stocks and
  • Poaching Motley Fool picks (Shanda, Netease, New Oriental, and ... GigaMedia)

Yet judging from its record -- and in particular, its record of scoring so much better on its winners than its losers, outperformance-of-the-S&P 500-wise -- I'd have to say that Brean Murray has profited handsomely from both predilections.

Until now
According to Brean Murray, the reason to stop buying GigaMedia today comes down to two key points:

  • First, the analyst sees: Online gambling revenue "moderating" in the second quarter of 2009, the rest of 2009, and all of 2010, given the challenging traffic trends.
  • Second, Brean believes that "potential severance payments" will cut into GAAP earnings this year.

Put 'em together with Brean Murray's skepticism about completing a potential sale of the online gambling business, and the analyst sees no more room to run for GigaMedia. I disagree.

Why? Because GigaMedia sells for just eight times earnings today, and barely 10 times free cash flow that has (or had, up until the recession hit) been growing by leaps and bounds. Most analysts expect GigaMedia to resume growing its profits soon, and indeed to achieve 20% annual growth over the next five years.

What's more, even if we presume that Brean Murray's concerns will come to pass, the analyst still expects GigaMedia to earn perhaps $0.60 per share in fiscal 2010 -- which means the company is selling for about 10 times forward earnings.

Foolish takeaway
Don't let short-term concerns dissuade you from buying this stellar performer of years past, and strong grower of years future -- especially when these "concerns" are based on profits numbers that leave the stock looking cheap even if they come to pass. As far as I can tell, GigaMedia's a winner, any way you cut it.

GigaMedia, Netease, and Shanda Interactive are Rule Breakers picks. New Oriental Education and GigaMedia are Global Gains recommendations. To read why GigaMedia shows up in these newsletters, give either (or both!) a free trial today.

Fool contributor Rich Smith does not own shares of any company named above, but is seriously considering putting some money on GigaMedia -- but not for at least 10 days. (The Fool has a disclosure policy, you know.) You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 380 out of more than 130,000 members.