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 best ...
The last time we checked in on investment banker Piper Jaffray, the company was busy crunching the numbers at Costco (NASDAQ:COST), trying to find an argument that would justify buying an apparently overpriced stock. Piper succeeded -- both in finding an argument and in outperforming the market by 10 points over the next three and a half months.

Which makes it all the more interesting when we see that yesterday, Piper was unable to come up with a reason to buy Motley Fool Inside Value pick Builders FirstSource (NASDAQ:BLDR). As my Fool colleague Timothy Otte described yesterday, Builders had a pretty miserable Q2 -- sales, profits, and gross margin down. Between news like this, and the fact that its February endorsement of the stock had already underperformed the market by a striking 24 points, the pain became to great to bear, and Piper downgraded the stock to hold.

Yet reviewing the same numbers that Piper saw, Timothy observed that Builders had increased its free cash flow in the first half of this year. I argued in June that Builders compared favorably with Home Depot's supply business on a price-to-sales basis. And Builders remains an active recommendation at Motley Fool Inside Value.

Whom to believe?
So who's right on Builders: the pros at Piper Jaffray, or we mere Fools? To provide an objective view of everyone's stock-picking acumen, we turn to Motley Fool CAPS. Our records are there for everyone to see, as is Piper Jaffray's, which sports a 62.57 combined rating that puts it well within the top half of players, if far from the actual top. It also has a record of getting about 41% of its predictions correct -- and of course, on the other side of the coin, getting it wrong 59% of the time.

Reviewing Piper's record on the last half-dozen or so picks that it has ended, we see:

Reviewing Piper's record, I must say I'm not terribly impressed. This analyst is developing a less-than-enviable record of zigging when the market zags, losing its customers' money in the process. Indeed, after tracking the analyst's performance for nearly a year now, we find that Piper's average up-or-down recommendation is beating the market by only 1.5 percentage points.

In contrast, the average Inside Value recommendation is doing several times better, beating the S&P 500 by an average of 5.5 points per pick. If you're curious, I'm averaging 6.2 points myself. Similarly, we're both beating the pros on accuracy -- 51% of Inside Value picks are outperforming the market, as are 59% of my own.

Foolish takeaway
I'm not saying Piper is wrong in predicting continued trouble for everything house-related in the U.S. -- Builders FirstSource included. The stock certainly could go down from here. That said, selling for just 0.25 times sales when the average stock in the home-improvement industry fetches 0.82 times sales, I simply don't think Builders can fall much farther without going subterranean. In my view, the odds favor an eventual recovery.

So there you have it, folks. Not one, not two, but four separate opinions on Builders FirstSource. But if you're still itching to learn more after hearing what Piper, Inside Value, Tim, and I all have to say, then click yourself over to CAPS and check out what the current score leader has to say about Builders. Currently outperforming the market by 23 points on his pick, this Fool just may know more about the company than the rest of us combined.

And for the most in-depth review of the company you'll ever be offered totally free of charge, grab yourself a free 30-day trial of Motley Fool Inside Value on your way out the door. Learn why we like this stock in any housing market.

Fool contributor Rich Smith does not own shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 588 out of more than 60,000 raters. Home Depot is an Inside Value recommendation. Amazon is a Stock Advisor selection. The Fool has a well-built disclosure policy.