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 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 ...
As trading winds down for the week, traders were getting wound up this morning over a conflicting pronouncement from investment banking heavyweight Lehman Bros. It seems the analyst dropped its price target on shares of Nasdaq OMX Group (NASDAQ:NDAQ) today ... and upgraded them to "buy."

Huh?
Yep. It seems a bit contradictory to me, too. But see if you can follow Lehman's logic here: According to the analyst, "market share declines in Nasdaq-listed trading, continued worries about volume growth, and concern about the company potentially launching another bid for London Stock Exchange (LSE)" have all combined to drag Nasdaq (the stock exchange, not the stocks traded thereon) shares down some 30-odd percent this year.

Lehman agrees that Nasdaq's problems make the shares somewhat less valuable, and so dropped its price target (all of two bucks) to $50 a share. But seeing as those shares currently sell for $35, Lehman argues that even with the lower potential price-peak, Nasdaq is now a "buy."

43% profit potential? Yes, that sure does sound like a buy. But how likely is it that Lehman is calling this one right -- that Nasdaq will reach its new "target" of $50 any better than it hit the $52 that Lehman previously predicted?

Let's go to the tape
Hint: Nasdaq never quite made it to $52, and to reach the new $50 target, it will need to get within four bits of its all-time high within the next 12 months. Seems a bit of a stretch, and the analyst's record doesn't give me a whole lot of confidence that Nasdaq will actually get where Lehman says it's going.

Although the analyst has hit a few balls straight out of the park ...

... Lehman has also made some really bad calls in the financial sphere:

But what is perhaps more instructive than its performance on stocks that it has picked, is the absence from this list of a few names Lehman has not endorsed (or at least not recently). You don't see Nymex (NYSE:NMX) up there, do you? Or InterContinental Exchange. Or CME Group. And while Lehman has made a recommendation on NYSE Euronext (NYSE:NYX) ... it's underperforming the market by 11 points on that one.

Notwithstanding Lehman's less-than-stellar record on financials in general, could the analyst be right on this particular prediction? Sure it could. Nasdaq sells for just 9 times trailing earnings, and most analysts expect the company to grow its profits north of 22% per year going forward. From this standpoint it appears to be cheap and a screaming buy.

That said, I can't help but notice that when you drill down to Nasdaq's free cash flow, you find it coming in at less than half the level of net earnings under GAAP. Viewed from that perspective, Nasdaq trades for 24 times trailing free cash flow -- and honestly looks quite fairly priced at its current level, relative to growth expectations.

Foolish takeaway
While I agree with Lehman, and with my Foolish colleagues at Motley Fool Inside Value, that Nasdaq looks attractive on the surface, I also see the merit in today's price -- and plenty of reason to believe Nasdaq won't go higher.