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 ...
It doesn't always take a great stock picker to tell you what to do with a stock. Sometimes, the answer's so obvious that a mediocre analyst can do the job just as well. Enter McAdams Wright Ragen.

This perpetual underperformer in the CAPS rankings downgraded shares of Nike (NYSE:NKE) to "hold" yesterday, pointing primarily to the stock's six-week, 10-point outperformance of the S&P 500. The analyst argues that since Nike usually trades between 14 times and 20 times forward earnings, the stock's valuation today at 15 times forward earnings is too high.

Um, wait a minute ...
I know what you're thinking -- 15 is a whole lot closer to 14 than to 20, right? So taking McAdams' argument at face value, Nike is a whole lot closer to being undervalued than overvalued. If so, the downgrade doesn't make much sense, right?

You're right. It doesn't make a whole lot of sense. But truth be told, when it comes to getting insightful advice on your stock picks, you, um, shouldn't come to McAdams. We've been tracking this stock picker on CAPS for a year, and the sum total of our experience tells us that these guys aren't the sharpest tacks on the corkboard. On average, 55% of its picks go awry, with the result that this analyst underperforms about 65% of the investors we track.

That said, McAdams has actually done reasonably well in one sector of the market: consumer goods and the retailers who hawk 'em:


McAdams says:

CAPS says:

McAdams' Pick Beating (Lagging) S&P By:




49 points

Starbucks (NASDAQ:SBUX)



10 points

Nordstrom (NYSE:JWN)



4 points




(3 points)




(8 points)

Between its record on consumer-goods stocks, and what appears to me to be Nike's unarguable overvaluation, I'm going to have to agree with McAdams on this downgrade.

Buy the numbers
Just because Nike has traded for "X" historically does not mean the stock must trade for "X" in the future. This recession appears to be hitting Nike hard. Whether the blame lies with cash-strapped consumers or competition from Reebok or Under Armour (NYSE:UA), Nike's free cash flow has tumbled from the $1.5 billion generated in both fiscal 2007 and 2008.

Despite growing sales strongly, Nike's trailing free cash flow now amounts to barely $800 million -- just half of reported earnings in the last 12 months. So while the stock may be selling for 16 times trailing earnings, and whatever-number-you-want-to-posit for future earnings, the simple fact is that the stock looks way, way more expensive when valued on its free cash flow. 

To my Foolish eye, there's just no way to use analysts' predicted 13% long-term growth to justify the 30 multiple to free cash flow that Nike's enterprise now fetches.

Foolish takeaway
When I look at Nike today, I see absolutely no margin of safety in the stock -- not just no room for error, but no room, period. If Nike manages to magically double its current rate of cash generation in a few months' time, well, maybe then we can talk. Until the advent of such a happy day, however, I have to conclude that McAdams Wright Ragen is right on this one -- or maybe even overoptimistic. Nike's a "hold"... at best.

Under Armour and Zumiez are Motley Fool Hidden Gems recommendations. Costco and Starbucks are Inside Value selections and Stock Advisor picks. Blue Nile and Under Armour are Rule Breakers selections. The Fool owns shares of Costco, Starbucks, and Under Armour.

You can find Rich on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 303 out of more than 130,000 members. The Fool's disclosure policy is picky about nail polish.