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 worst and sorriest, too.

And speaking of the best...
Two of the biggest names on Wall Street weighed in on the prospects for Motley Fool Hidden Gems pick Nuance Communications (NASDAQ:NUAN) this morning. Both Needham & Company and Friedman Billings Ramsey gave the stock the thumbs-up. In what may be a coincidence (or perhaps not), 90 minutes after the upgrades were announced on Briefing.com, Nuance made an announcement of its own. It's issuing $220 million in convertible debentures, paying 2.75% interest and due 2027.

Now, we don't know what's got the analysts so optimistic about Nuance; media reports are mum on the issue. Just one day earlier, the debt issuance was slated to run to only $150 million. (At nearly half again as big, it seems that investors are eager to lend this company money -- a good sign in today's credit-crunched environment.) It may be that the analysts saw something they liked in yesterday's Q2 earnings news. Or, in my opinion, it may be that the stock tumbled 5% in response to that news, tempting the analysts with the prospect of a bounceback.

Lacking data on the analysts' rationale, all we poor Fools have to go on are their records. We'll examine those now, using Motley Fool CAPS as our guide.

Let's go to the tape
We'll begin with a side-by-side comparison of our two Nuance fans:

Here we read a tale of tragedy, Fools. Just less than two months ago, little FBR was flying high with a CAPS rating approaching the top 10% of all players. Today, we find it hiding behind the figleaf of our "Under 20" label, its record in ruins, its score subzero.

Needham fares better, but only by a little. Like FBR, we last checked in on this analyst in June, when it boasted a respectable 72 CAPS rating. Needham has taken a hit as well, but at least it remains in the top half of its class.

What happened to so devastate our two analysts' records? After all, Needham has actually been making some pretty successful picks lately. Its problem resides in ancient history, and several bad calls, made in the past, and recently closed out for hefty losses. These include:

In contrast, FBR's issue seems to be that it's in a (hopefully temporary) slump, with 21 of its last 32 calls currently underperforming the market and torpedoing its accuracy score, notably:

Turnaround imminent?
Their respective current problems aside, I wouldn't necessarily count these bankers out just yet. FBR's picks, lagging today, could turn around tomorrow. Meanwhile, Needham has closed out some bad decisions, and it may perhaps now have more time to focus its efforts on finding some winners. (So far, it's doing pretty well.)

Moreover, I can't help noticing that the very pick that brought this situation to our attention -- Nuance -- has performed particularly well for FBR in the past. As you may have noticed, our most recent snapshot of FBR described the firm's decision to pull its endorsement of Nuance, based on that firm's $265 million purchase of Time Warner's (NYSE:TWX) Tegic Communications. Prior to that rethink, FBR had racked up 37 points worth of market outperformance on Nuance. Here's hoping for a repeat.

Who else likes Nuance? We do! Motley Fool Hidden Gems co-advisor Bill Mann has twice recommended the stock to our members, giving us a more-than-three-bagger and a near-two-bagger in the process. Check out the rest of our market-whomping picks when you claim your free, 30-day trial membership of the service.

Also free: total access to our CAPS page on Nuance, where you can learn the identity of one wise Fool who's done almost as well as Bill in predicting Nuance's performance. Just don't be surprised when you find out that this Fool is no Wall Street stock jock -- just an ordinary individual investor just like you and me.

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 currently ranked No. 260 out of nearly 60,000 players. Akamai Technologies is a Rule Breakers recommendation. Time Warner is a Stock Advisor selection. The Fool's disclosure policy has its own subtle charms.