This Just In: Upgrades and Downgrades

Editor's note: A previous version of this article mistakenly included text from another article. The Fool and the author regret the error.

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.

And speaking of the worst ...
Already sagging in the wake of reports that no, Virginia, Liberty Media (NAS: LMCA) does not intend to take Sirius XM Satellite (NAS: SIRI) private, shares of the satellite-radio star took another hit yesterday. For this, you can thank the (un-)friendly analysts at Miller Tabak, who pulled their buy rating on the stock and downgraded to neutral.

Swiping away two of the three legs underlying the Sirius buy thesis, Miller argues that not only is Liberty unlikely to try to acquire Sirius in toto, but the analyst also warns that Sirius itself is unlikely to be buying back shares because "at this point such a move would play into LMCA's strategy." Reducing its share count through buybacks, you see, would increase the proportion of Sirius shares controlled by Liberty, which already owns a 40% "as-converted" stake in the company. Assuming that's a result Sirius would rather not happen, a buyback would appear unlikely.

Two down, one to go
Of course -- Miller's observation notwithstanding -- even minus two legs, there's still one leg remaining: valuation. So how sturdy is that one looking?

Despite downgrading the stock, Miller left its price target on Sirius intact at $2.55 per share. This number suggests there's still about 9% upside from Sirius' current share price, and considering that I've been a pretty public backer of Sirius stock in months past, you might expect me to agree with that assessment. You might expect me to keep on cheering for Sirius and encouraging investors to stick around for the 9% gain.

I don't.

Valuation matters
Granted, Sirius' rising levels of profitability mean that the stock, priced at 53 times trailing earnings just a few months ago, now sells for only 33 times trailing earnings. That sounds like a good thing, but there's one "problem" with it.

The reason I've backed Sirius for so long, you see, is that historically its reported earnings didn't give the company enough credit for the real free cash flow it was generating behind the scenes. Unlike supposed rival Pandora Media (NYS: P) , which continues to report losses and burn cash, Sirius was actually a cash-generating machine in disguise.

This all changed in Sirius' most recent financial report, however, which showed that Sirius' reported earnings of $427 million have finally overtaken actual free cash flow ($406 million). As a result, shares that look overpriced at 33 times earnings (relative to 20% growth expectations) are actually even more expensive when valued on free cash flow. While I certainly prefer Sirius over its upstart Internet-radio competitor, my feeling now is that the profits Sirius had to offer us last year have already been captured by the stock's 30% run-up -- profits that, incidentally, anyone who followed my advice and bought Sirius last year will already have pocketed.

Foolish takeaway
There's no denying the pleasure of buying a stock and watching it outperform the market by a healthy 19-percentage-point-margin, as Sirius has done over the past few months. It's certainly tempting to hope that there are more profits in store, and to hang around in expectation of the same. Unfortunately, the numbers I'm looking at tell me that by now, the vast majority of the profit that was there for the taking at Sirius has already been taken.

Now's not the time for false hope. Now's the time to count your winnings. The time to declare victory and go home. Stay tuned, though. If better prices return, I'll be sure to let you know. Follow my actions on Sirius on my Motley Fool CAPS account, right here.

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At the time thisarticle was published Fool contributorRich Smithowns no 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. 369 out of more than 180,000 members. The Motley Fool has adisclosure policy. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors.

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