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." While the pinstripe-and-wingtip crowd is entitled to its opinions, we've got some pretty sharp stock pickers down here on Main Street, too. (And we're not always impressed with how Wall Street does its job.)

Given that, perhaps we shouldn't be giving virtual ink to "news" of analyst upgrades and downgrades. And we wouldn't -- if that were all we were doing. Fortunately, in "This Just In," we don't simply tell you what the analysts said. We 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.

Two retail bargains
Great news for bargain stock shoppers today. According to the bright young minds at FBR Capital, shares of clothier American Eagle (NYSE: AEO) are "cheap with lots of cash and several potential catalysts," while Aeropostale (NYSE: ARO) has a price that -- if not exactly nice -- at least "accurately reflects" the risks in the stock.

I know, I know. These aren't the stock recommendations you want to hear. Across the markets, the prevailing wisdom is that traditional retailing is dead. (Nasdaq: AMZN) is eating the bricks-and-mortar crowd for lunch, growing revenue 38% in the most recent quarter. What few sales don't flow to Amazon get snapped up by eBay (Nasdaq: EBAY) and Overstock (Nasdaq: OSTK) – whose sales are up 16% and 0.4%, respectively. The dregs of the clothing market then wind up in bulk lots in the bins at Costco (Nasdaq: COST) (16% revenue growth). (In fact, I've made a very similar argument myself.) So if investing in traditional retail isn't your thing, I get that.

Let's go to the tape
I especially get why you might not want to follow FBR's advice, given this analyst's truly abysmal reputation on specialty retail stocks. According to our CAPS stats, FBR is currently trailing the pack with a record of barely 40% accuracy on its picks in this industry. Over the five years we've been tracking its performance, FBR has been wrong about Talbots, wrong about Gap, and wrong about Abercrombie & Fitch.


FBR Capital Rating

CAPS Rating
(out of 5)

FBR Capital's Picks Lagging S&P by

Talbot's Outperform * 10 points (picked five times)
Gap Outperform ** 24 points (picked twice)
A&F Outperform * 37 points (across four picks)

Wrong, wrong, wrong. But did you know that FBR's been largely right about American Eagle, and even more right about Aeropostale? It's true. This analyst's three separate recommendations of American Eagle (two buys, and one sell) have outperformed the market by a combined 26 percentage points. Its single instance of advice on Aeropostale (a sell, late last year) outperformed the S&P's performance by 36 points.

So while I admit that the analyst suffers from a bit of a checkered past in this industry, in these two instances, I believe its recommendations deserve a listen.

One mediocre idea …
According to FBR, it's finally time to stop selling Aeropostale. At just 7.6 times earnings, Aeropostale's stock price already encompasses "the potential for a persistent negative sales and margin trend this year." The company is "solid," says FBR, praising what it calls the company's good management and conservative guidance. Moreover, Aeropostale's "significant free cash flow and plans to continue buying back stock" make the shares look inexpensive based on current numbers.

For the record, I agree with this recommendation in part, and disagree in part. A valuation of 7.6 times earnings does look cheap if Aeropostale succeeds in achieving the nearly 13% earnings growth rate that analysts expect of it. That said, the company hasn't yet provided investors a cash flow statement to accompany its last earnings report, making it impossible for me to confirm FBR's assertion of "significant" free cash flow. I can tell you that last year, free cash flow amounted to barely 70% of reported net income. So while the stock may look cheap on the surface, I'm not convinced it's cheap enough to buy -- and won't be until Aeropostale shows us the numbers.

… and one good 'un
But while I've got reservations about following FBR's lead on Aeropostale, I wholeheartedly endorse its recommendation of American Eagle. Among the many positives FBR mentioned in its upgrade to "buy," the ones that stand out to me ran as follows: "AEO remains a strong free cash flow generator with $3 per share in cash and a dividend yield of more than 3%."

Free cash flow for the last 12 months at American Eagle ran to $264 million, or 67% better than reported earnings. With a market cap of just $2.5 billion, this has the stock trading for less than 10 times FCF already -- not bad for a reputed 13% grower. The company's also sitting on more than $730 million in cash, which brings its enterprise value-to-free cash flow ratio all the way down below 7.

Foolish takeaway
I conservatively estimate that American Eagle stock is selling for a roughly 50% discount to its true worth. How long it will take investors to figure this out is anybody's guess. But with the company paying investors a 3.2% dividend for their patience, I'm more than happy to wait for Mr. Market's epiphany.

Which stock is the better bargain: American Eagle, Aeropostale, or Amazon? Don't guess. Add all three to your Fool Watchlist and find out for sure.