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." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.

Et tu, Jefferies?
Is that a knife in your back, Alcatel-Lucent (NYS: ALU) ? After the 12% decline in market cap you suffered yesterday, I'll bet it feels like one -- and I know who put it there: Jefferies & Co., which downgraded your stock to "underperform" on Wednesday.

One year ago, Wall Street analyst Jefferies & Co. stunned the investing world with its 180-degree reversal on Alcatel-Lucent. Previously a confirmed pessimist on the French telecommunications equipment maker, Jefferies argued last autumn that Alcatel was poised to win "increased EVDO software sales into CDMA operators" Verizon (NYS: VZ) , Sprint Nextel (NYS: S) , US Cellular, and Leap Wireless. Even without major sales to AT&T (NYS: T) , which was married to the GSM standard, Jefferies reasoned that this meant investors were "underestimating the potential benefit" for Alcatel. Against my advice, the banker urged investors to buy Alcatel ahead of all the good news. And what happened next?

Alcatel tanked, underperforming the market by a whopping 32 percentage points.

Jefferies cuts both ways
This, by the way, isn't the first time Jefferies has led investors astray on Alcatel. In fact, the analyst's previous recommendation actually performed worse. When Jefferies called Alcatel an under-performer in December 2008, the stock instead raced ahead, outperforming the Dow Jones Industrial Average (INDEX: ^DJI) significantly, and beating S&P's returns by more than 36 percentage points.

Sad to say, this is all part for the course for Jefferies -- which while a fine analyst in many respects, and a net winner in several industries, has a record of getting its comm-stocks picks wrong nearly three times as often as right:


Jefferies Rating

CAPS Rating
(out of 5)

Jefferies' Picks Beating (Lagging) S&P by

Qualcomm (NAS: QCOM)



60 points

Cisco (NAS: CSCO)



(22 points)




(68 points) (picked twice)




(80 points)

Play it again, Jeff
With a record like the one Jefferies sports, I honestly wonder why investors pay attention to this analyst. Clearly, Jefferies couldn't pick a bottom (or a top) on the stock if its life depended on it. And as for recognizing a bargain based on the numbers ... well, there's really no reason to buy Alcatel based on its numbers, either.

Consider: While many investors continue to rave about Alcatel's supposed profits, the truth is that there's not much to them. Sure, Alcatel reported "earning" $578 million over the past 12 months. But free cash flow remains most decidedly negative. (In fact, at the same time Alcatel was trumpeting its return to profitability, the company was burning through $370 million in negative free cash flow.) To me, this rate of real cash-burn is more significant than the quirk of GAAP accounting standards that somehow permits Alcatel to report a profit while burning cash.

But even if you disagree, even if you take the GAAP numbers at face value -- Alcatel today sells for more than 12 times reported net income. But it pays no dividend, and even the analysts who remain optimistic about the stock don't expect Alcatel to grow faster than 9% per year over the next five years. Fools, that's hardly a bargain.

Foolish takeaway
Alcatel investors may feel betrayed by Jefferies' sudden reversal of opinion on their company this week. But to me, the question today isn't why Jefferies suddenly "turned coat" on Alcatel. The real question is why the analyst ever recommended buying this stock in the first place.

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At the time thisarticle was published Fool contributorRich Smithdoes not own shares of (nor is he short) any company named above. You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 295 out of more than 180,000 members. The Motley Fool owns shares of Qualcomm.Motley Fool newsletter serviceshave recommended buying shares of Cisco Systems and AT&T. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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