This Just In: More 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." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.

And speaking of the worst ...
It's been a month since FBR Capital first issued its shocking endorsement of tiny power equipment maker Capstone Turbine (Nasdaq: CPST). At the time, I acknowledged the analyst's strong record of picking winners in the electrical equipment industry, but expressed doubts about its fondness for Capstone. I suggested investors who wanted to follow FBR's lead should at least limit their risk, and make sure to "bet small, lose small."

It seems not everyone listened. This morning, another analyst decided to take the plunge on Capstone. According to Rodman & Renshaw, this buck-sixty stock is certain to outperform the market, and could very well hit $2.50 within a year -- and easy 55% gain for investors who buy today. 

Let's go to the tape
There's just one problem with that recommendation: the analyst making it. Unlike FBR, which at least had a record of success to bolster its faith in Capstone, Rodman can make no such claim, at least according to CAPS. This analyst has been perfectly wrong on every recommendation recorded in CAPS:

Rodman is one of the literal worst analysts on Wall Street, ranked in the bottom 20% of the investors we track on CAPS. As a result, investors should probably think twice -- and review the numbers three times -- before following its advice, especially in Capstone's case.

Capstone Turbine: Buy these numbers?
On the one hand, it's true that Capstone Turbine isn't in as bad a shape as it once was. The firm's net loss for the fiscal year ending in March was about $30 million less than what it lost the previous year. Cash burn also seems to have moderated somewhat.

Still, the company remains deeply unprofitable today, and it costs 80 times optimistic estimates of what it might earn next year. Free cash flow remains negative, and at the rate it's going, Capstone could burn through its cash reserves within about 18 months. Since it's never turned a profit, nor generated free cash flow for a full fiscal year, Capstone is anything but an obvious bargain.

Help wanted: white knight
Granted, there's still the possibility of a buyout, a scenario FBR posited when suggesting "an acquirer with a larger global brand presence, supply chain, and stronger balance sheet" might be interested in Capstone. As I described last month, Caterpillar (NYSE: CAT), Ingersoll-Rand (NYSE: IR), Cummins (NYSE: CMI), and General Electric (NYSE: GE) are potential buyout candidates -- particularly the latter two, given GE's strong balance sheet and Cummins' demonstrated interest in gas turbines.

That said, big firms tend to snap up small fries like Capstone primarily to juice their own growth rates. Generally speaking, a shop like Capstone is more likely to be acquired when it's doing well than when it's doing poorly.

Capstone is not doing well. Not long after FBR recommended buying the company last month, Capstone updated investors on its progress for the fiscal fourth quarter. Sales of $23 million fell short of Street expectations. The firm's $0.10-per-share loss was more than three times larger than what investors had been led to expect.

Foolish takeaway
For me, this lackluster performance undermines the buyout scenario for Capstone. If a buyout offering does not emerge, Capstone will have to muddle through on its own. Alas, a dozen years of such efforts have so far generated little more than GAAP losses, cash burn, and heartburn for Capstone's shareholders. I fear that a vote of confidence from one of Wall Street's worst analysts will do little to change that.