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.

Is this thing on?
On Wednesday, Charter Equity upgraded shares of RF Micro Devices (Nasdaq: RFMD) to "buy." Ace investment banker UBS held the stock at "hold," but simultaneously raised its target price on the stock by a whopping 36%. Result: The stock's down nearly 5% over the past two days of trading. This is not how these things are supposed to work. To say the least.

Ordinarily, investors would take an endorsement from Charter Equity as an excuse to buy shares of RF Micro, bidding the shares up. When UBS -- an analyst that ranks right up there with the best bankers we know of on CAPS -- says the stock is worth a good third more than it's selling for, this should also have been viewed as good news. Yet for some reason, investors are having the opposite reaction to Wall Street's kind words. Are they right to be nervous?

Let's go to the tape
In the case of Charter, your guess is as good as mine. No major news outlets seems to have details on yesterday's upgrade, and we don't have a tracker set up for the analyst on CAPS, so there's not a lot I can tell you about these folks' reputation for excellence in stock picking. Fortunately, that's not the case at UBS -- not by a long shot.

We've been tracking the performance of UBS's stock recommendations for well over a year now on CAPS. Over that time, UBS has consistently proven itself an ace picker of top stocks, scoring well within the top 10th percentile of our CAPS members. It's also proven itself a superb selector of semiconductor stocks recently, with a portfolio of active recommendations that's currently outperforming the broader S&P 500 by -- you'd better sit down for this -- more than 1,900 percentage points across 39 active picks.

Fully 67% of UBS's semiconductor picks are beating the market (beating it with a stick, I should say), including such runaway winners as ...

So suffice it to say that when UBS looks forward to RF Micro's Tuesday earnings release and tells us this ...

• "We expect RFMD to report strong results and outlook" [emphasis added].
• RF Micro will report $295 million in Q3 revenues and $0.19 per share -- ahead of consensus estimates on both counts.
• The company will likely beat consensus estimates in Q4 (earnings $0.17 per share, or $0.02 more than anyone else thinks), then move on to "beat the Street" by a good $0.03 per share in fiscal 2011, and $0.06 in fiscal 2012.

... well, that catches my attention right quick; the more so when investors react to the good news by selling RF Micro shares, and making it cheaper to buy the shares ahead of earnings!

Buy these numbers?
Pardon my hubris in saying so, but you should be enthused about this opportunity, too. I mean, yes, I understand that the stock doesn't look particularly cheap today. At 19 times trailing earnings, and with future growth projected at 15% per year for the next five years, RF Micro doesn't fit neatly into the PEG paradigm for value.

But consider: RF Micro's growth rate isn't that much slower than what you'll find at rival mobile semiconducting plays TriQuint (Nasdaq: TQNT), Skyworks (Nasdaq: SWKS), or Broadcom (Nasdaq: BRCM), however, its P/E ratio is significantly cheaper than any of these (excepting only TriQuint). And honestly, even a 19 P/E isn't that unreasonable, considering the bright future most folks see for mobile computing over the next few years.

What's more, RF Micro isn't really as expensive as even its P/E ratio suggests. Valued on the cash it generates, rather than just the profits GAAP accounting standards permit it to report, RF Micro produced a whopping $199 million in free cash flow over the past 12 months. That's Fool-y 73% better than its GAAP numbers suggest. Based on its current, sell-off-depressed market cap, that means you can buy this 15% grower for the low, low price of just 11 times free cash flow today.

It's a bargain price, but I don't think it will last long. Remember ... earnings come out Tuesday. Be prepared.