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 …
Shares of Motley Fool Hidden Gems recommendation Natus Medical (NASDAQ:BABY) are defying the market rebound this morning, dropping for a second straight day after receiving a downgrade to hold from CAPS pariah Needham & Co.

With a record of guessing wrong on its picks 57% of the time, and a CAPS score so negative at this point that Needham underperforms more than 80% of investors worldwide, you might not expect investors to react so, well, negatively to a downgrade from Needham. To the contrary, you might expect them to take this downgrade as a contrarian indicator that it's time to buy, buy BABY.

Let's go to the tape
After all, Needham has picked more than its share of barkers over the years:

Fortunately though, Natus Medical has precious little to do with the deflating solar bubble, and much more to do with technology and medical technology in particular -- an area where Needham's shown some real proficiency:

The reasoning
With its firm grasp of the medical sphere already proven, you have to weigh carefully the reasons Needham cited in downgrading Natus yesterday. Key to the bear thesis here (or at least the not-quite-bull -- Needham only dropped Natus to "hold" after all), is the fear that hospitals across the country are cutting their capital budgets, leaving a smaller revenue pool in which BABY can play.

Needham cited recent comments from GE (NYSE:GE) Healthcare regarding its own struggles to sell into a hospital market in which GE, Natus, and -- well, let's not leave anybody out -- Rule Breakers recommendation Intuitive Surgical (NASDAQ:ISRG) too -- all participate. In consequence of which, Needham predicts a decline in Natus's "hearing, screening and newborn care products" next year (although overall revenues should grow inorganically, thanks to Natus's recent purchase of NeuroCom International).

So let's see now: Competence in the medical sphere? Check. Logical argument? Check. Abysmal record picking stocks, generally? Unfortunately, that's also a check -- but here's one thing you may not know about Needham that, in my opinion, rebuts the presumption that an underperforming analyst as tracked by CAPS, generally, is wrong on every specific pick: Needham's an absolute genius when it comes to Natus.

These bankers discovered Natus back in March 2007, and since initiating coverage with a buy rating then, Needham's Natus pick has simply thrashed the market -- up 30% in 18 months, versus a 17% decline for the S&P 500.

Foolish takeaway
After a run-up like that, you can't really blame Needham for wanting to declare victory and go home. It is victorious, to the tune of 47 points worth of market outperformance.

As for investors who've shared the wealth alongside Needham, I suggest they do likewise. With Natus now selling for a 43 P/E and a price-to-free cash flow ratio of nearly 55, I just don't see a lot more upside here, Fools. Time to count your winnings and start looking for the next big win.