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 track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

And speaking of the best ...
What do you do when two of the market's top stock pickers take diametrically opposing positions on one of the biggest names in retail? Personally, I listen up. (What can I say? I love a good argument.)

UBS singled out Target (NYSE:TGT) for disapproval yesterday, downgrading the stock to "neutral," and arguing that the store once so trendy as to garner the nickname "Tar-ZHAY" is fast becoming irrelevant to U.S. consumers. Meanwhile, next door at Bernstein, the analysts are feeling more bullish. The analyst initiated coverage on Target at "outperform," rating the stock higher than two other initiations made yesterday -- Costco (NASDAQ:COST) and Wal-Mart Stores (NYSE:WMT), both of which Bernstein deems mere market performers.

Who's right? Who's wrong? As always, we seek our first clues to the analysts' acumen in their records.

Let's go to the tape
What we find there is a bit confusing, however, so let me walk you through this step by step, beginning with UBS. Ranked just shy of the top 10% of investors tracked by CAPS, UBS also has the bigger paper trail in multiline retail. Problem is, "bigger" isn't always better:

Turns out, across the eight affirmative buy/sell recommendations UBS has made over the past three years, it's made the right call just twice -- booking a large gain on the market when it dumped Saks in 2006, and eking out a smaller advantage from its 2007 Kohl's recommendation.

In contrast, Bernstein's track record in multiline retail is both shorter, and somewhat less ghastly. It's made a grand total of three such picks in three years -- but gotten two of them right:

Zeroing in on Target
So now these two analysts appear before us, making their cases for and against Target. Whom are we to believe? Between its better record in retail, and the fact that the last time Bernstein covered Target, it managed to beat the market with its endorsement, you'd probably expect me to back Bernstein's play today -- but I don't. Fact is, I think UBS is more likely right with its neutral position on the retailer.

Why? The numbers speak for themselves -- and what they tell us is that Target has a quality operation, decent growth prospects, but a stock price that's a middling value at best.

With free cash flow that tracks its reported earnings almost dollar-for-dollar, you can take Target's P/E to the bank; it accurately describes the company's valuation. (Incidentally, it also suggests why Bernstein thinks Target is a better buy than either Costco or Wal-Mart -- both of the latter generate far less free cash flow than their reported GAAP "net income" might lead you to believe.)

Problem is, most analysts think Target will grow at just less than 14% per year over the next half-decade. For a star retailer like Target, that may justify the stock's 16.8 P/E (especially when you toss the 1.4% dividend into the mix). It certainly looks cheaper to me than do the two stocks Bernstein shrugged off -- Costco and Wal-Mart. But it does not scream "bargain!" At best, Target's a good company selling for a somewhat less-than-great price.

Foolish final thought
But if Target is cheaper than both Wal-Mart and Costco, yet still too expensive in its own right, are there any bargains at all to be found in retail?

There are. Its nosebleed P/E notwithstanding, Amazon.com's (NASDAQ:AMZN) prodigious free cash flow and rip-roaring growth rate make Amazon look Fool-y as good as Target on a price-to-free cash flow ratio, relative to their respective growth rates. Combined with Amazon's history of innovation -- the Kindle being the most prominent example, but not even the most recent -- Amazon remains my favorite play in retail.

Give it a look. Amazon just might surprise you.