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

And speaking of the best ...
Sometimes, it takes a lot to keep a good stock down. More than a high price-to-earnings ratio, and more than an analyst downgrade. Case in point: Swiss stock shop UBS told investors to sell Motley Fool Hidden Gems and Rule Breakers pick Under Armour (NYSE:UA) yesterday, but the shares went right up alongside the rest of the retail sector regardless.

Why might that be? I haven't a clue, because UBS published its recommendation without providing so much as a word of explanation for why it's so down on the stock. Not a single major media outlet has any details on the initiation.

Speak up, UBS!
There are few things more frustrating to the individual investor than the one we're faced with today. UBS says it hates Under Armour -- the same Under Armour that CAPS shows it's twice recommended in the past -- yet it won't explain its reasoning. But while we're unable to tell you what UBS thinks, here at CAPS we can at least clue you in to how well it thinks.

Nearly three years of diligent data-crunching here at the Fool reveal that there's good reason to worry about yesterday's sell rating. For one thing, UBS ranks among the very best investors we track at CAPS. It gets most of its stock picks right and outperforms nearly 90% of its peers in the process.

UBS seems particularly skilled in the Specialty Retail industry, where 53% of its picks (a number that's better than it sounds) have crushed the market:

UBS has also picked some winners within the Textiles, Apparel and Luxury Goods segment -- the "special stuff" that the specialty retailers sell. For example:

Yet I couldn't disagree more with UBS's advise to sell Under Armour yesterday.

Bait first, then switch
Why? Mainly because, when I review Under Armour's financials, the numbers just don't shout "sell!" at me. While I admit that the company's 28 P/E looks a little pricey relative to Under Armour's 19% projected long-term profits growth, I'm more interested that:

• Under Armour carries no net debt, meaning it has more cash ($66 million) than long term debt ($18 million).
• And, from a free cash flow perspective, Under Armour is actually quite a bit cheaper than its P/E makes it seem. With nearly $47 million in trailing free cash flow, this company sells for a price-to-FCF ratio of only 22.8. To my mind, that's not too high a premium to pay for a 19% grower.

What's more, those growth estimates may prove conservative. Under Armour has outperformed analyst predictions in seven of the past eight quarters, after all. And it continues to innovate, by bringing new products to market that could boost earnings further. This week's introduction of the "Recharge" suit -- a unique product that helps athletes recover quickly from exercise-induced injuries -- at $190 a pop just illustrates how Under Armour can surprise the market seemingly at will.

Foolish takeaway
Is Under Armour an obvious buy at 23 times free cash flow? Certainly not. It's actually a bit expensive for my taste, and were I the one handing out the ratings, I suspect I'd be calling this one a hold for now.

But hey, Under Armour reports earnings before the end of the month. There's always the hope that investors will misread 'em as badly as UBS is misreading the valuation today -- and give me a chance to buy this one at a discount. Hope springs eternal.