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 worst ...
eBay (NASDAQ:EBAY) received a "You Won!" notice yesterday, in the form of an analyst upgrade to "neutral." And although you may quibble over the competence of AmTech Research, the analyst in question, and the half-hearted nature of its upgrade, two things are certain.

First, AmTech knows eBay. It's scored more than six points of market outperformance over the previous two calls we've tracked -- that's pretty good over the last year. Second, AmTech was right to upgrade. In fact, it may even have been too conservative.

Hold up a sec -- what's this about competence?
Oh, didn't I mention? AmTech's not particularly good at its job. According to our CAPS records, the analyst gets almost three guesses wrong for every two it gets right, ranking behind roughly 80% of the investors tracked on CAPS. Recent blunders include:

Its winning bets have been fewer and farther between:

Bummer. And you said the upgrade was half-hearted, too?
To say the least. eBay just finished warning that Q3 sales will fall near the low end of Wall Street estimates and that in a cost-cutting move, it will slash its payroll by some 1,600 positions. Cribbing a reference to pop culture, AmTech opined yesterday that "the market views eBay as 'mostly dead.'" Yet despite upgrading the shares, AmTech gave us a bit of a head fake: "We do not recommend buying or even holding eBay shares at this juncture." Strange, because most investors, I suspect, think that a "neutral" rating means just that: "Hold the shares."

And so do I
So AmTech's guilty of mangling the English language. Its upgrade makes no sense in light of its pessimism. And its record of stock-picking is abysmal. Now's the time when I tell you the analyst is an idiot, and you should ignore AmTech entirely. Right?

Wrong. The valuation hung on eBay today is so darn cheap that you'd have to be blind to miss it. Not even AmTech could mess up this call.

eBay currently trades for just 9 times its trailing free cash flow, and that's not even counting the company's cash. If you run a simple enterprise value-to-free cash flow calculation on this one, I think you'll find that the market is valuing eBay at a mere 7.5 times its free cash flow -- an absurd valuation by any measure, considering that most analysts expect it to grow profits at 15% per year over the next half-decade, even in the face of a recession.

Foolish takeaway
A margin of safety this big cannot be ignored. I don't just agree with AmTech's upgrade of eBay. If I were AmTech, I'd go one step further and call this one a "buy."

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