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.

And speaking of the best ...
... did you hear about Oppenheimer's VMware (NYSE: VMW  ) upgrade? Once one of Wall Street's better performers, Oppenheimer ran into some difficulties in 2011, as pick after pick began to lag the market. Today, Oppy may not be the worst analyst we track, but it's no longer anywhere near the best. In fact, at last report Oppy was ranked just above the 50% mark for analysts we track on CAPS.

Yet heedless of its impaired record, the analyst clambered way out on a limb yesterday to urge that investors buy VMware. According to Oppy, you see, VMware shares will hit a nice, round $100 share price by the end of next year -- a near 20% gain from today's prices. But is that likely? Could VMware be the pick that helps Oppenheimer restore its reputation as a great stock picker?

Growth is good ...�
Oppenheimer isn't alone in expecting big things from VMware in 2012. On average, Street analysts predict that the company will earn $2.51 per share, or about 17% growth from 2011 levels. By way of comparison, that's close to twice the growth rate predicted for rival IT giants such as Microsoft (Nasdaq: MSFT  ) or Hewlett-Packard (NYSE: HPQ  ) -- where 2012 earnings growth is estimated at roughly 10%, or Citrix Systems (Nasdaq: CTXS  ) . And this story gets even better, the further on you read.

According to StreetInsider.com, Oppenheimer thinks VMware has the potential to grow its revenues 20% per year. Add in a bit of margin expansion, and the consensus on Wall Street is that VMware might deliver long-term earnings growth in excess of 26%.

The company's "strong secular growth drivers" and "high growth markets," explains Oppenheimer, are key to its argument that now's the time to buy the stock. Just as key, though, are VMware's "strong cash flows," "solid fundamentals," and "reasonable valuation."

I agree.

Growth is good ... but cheap is better
At 56 times earnings, VMware looks pretty expensive, I admit. But consider: At last report, VMware was generating free cash flow at a rate more than 130% as great as its reported GAAP earnings. With $1.5 billion in such "cash profits" generated over the past year, the company sells for a price-to-FCF ratio of just 23.5, which is less than half its apparent P/E.

Oppenheimer's also right about the company's "solid fundamentals." If you factor in the more than $3.5 billion in net cash on VMware's balance sheet, the resulting enterprise value-to-FCF ratio works out to just over 21. And again, this price will buy you a stock growing at well over 26% per year.

Foolish takeaway
Earlier this year, I publicly endorsed VMware parent company EMC (NYSE: EMC  ) as offering one of the most compelling tech bargains in the world, and a better deal than Citrix, VMware, or fellow tech darling salesforce.com (NYSE: CRM  ) for that matter.

I stand by that conclusion. At an enterprise value just 10 times annual free cash flow, and 17% growth, EMC remains my favorite stock in this sector. But don't let that scare you away from higher-growth VMware. It's a bargain in its own right -- just not as good a bargain as EMC.

EMC might look like a bargain, but if you're looking for more investing ideas as we turn the corner to 2012, take a copy of our new free report, "The Motley Fool's Top Stock for 2012." It features a company that our experts think has plenty of prosperity ahead but is still being overlooked by the market. Thousands have already requested access, and it'll be available for only a limited time. Get your copy --�it's free.