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 worst ...
As markets turned green and climbed higher yesterday, investors in one company failed to join in the good cheer. Matrix Research kicked out the stool from under networking-equipment maker Juniper Networks (NASDAQ:JNPR). It abruptly dropped the stock three notches, all the way from "buy" to "strong sell," and turned the ticker symbol a wan shade of red. Why? No one seems to know, and judging from what we know about how Matrix works, no one's likely to learn the reason, either.

As longtime Fool theGreenMartian has observed, Matrix has "a distressing habit of being absolutely rational with their upgrades and downgrades." To which I'd add, not just "rational" -- but right on the money. Not all of Matrix's ratings make it into the near-comprehensive database at briefing.com. But the most recent Matrix rating we do see there for Juniper -- a May 2006 upgrade from "buy" to "strong buy" -- turned out to be quite propitious, as the stock proceeded to rise 20% to the market's 12% through yesterday's close.

Need further evidence of Matrix's market magic? Reviewing the research house's performance as we track it on Motley Fool CAPS, we see that it scores a respectable 87.32 CAPS rating, with 51.45% of its picks turning out winners. For example:

Of course, Matrix does make wrong calls pretty often. Here are a couple of decisions I'll bet Matrix wishes it had back:

Which table will Juniper be appearing in, a few years from now? My guess is the "lagging" table. Why? Because when I look at Juniper's numbers, I just plain don't see a case for the stock being so clearly overvalued as to justify a sell rating -- strong or otherwise.

While Matrix may be down on Juniper today, the other analysts who follow the stock -- more than two dozen of them -- like it plenty. On average, they predict that the firm will grow its profits at 18% per year over the next five years.

When you consider that Juniper generated $653.5 million in free cash flow over the past year, this gives the firm a bargain-priced price-to-free cash flow ratio of 15.6. Throw in the firm's net cash balance to get a valuation of the business qua business, and you're staring at an enterprise value-to-free cash flow ratio of just 13.2. Either way, the multiple to free cash flow shows a material discount to the firm's growth rate -- making Juniper look to me much more like a buy than a sell.

Hey, but what do I know? I'm not the top CAPS scorer on Juniper. To find out who is, and learn what this mystery investor thinks about the company at today's price, just click here.

Fool contributor Rich Smith does not own shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's ranked 33 out of more than 24,000 raters. Nuance is a Motley Fool Hidden Gems recommendation. The Fool has a disclosure policy.