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'll be tracking the long-term performance of Wall Street's best and brightest -- and worst and sorriest, too.

And speaking of the best ...
It's the eternal question: Is ketchup a vegetable, or just a condiment? Doesn't matter, says Citigroup -- it's a buy either way. Early this morning, the international megabank upgraded shares of H.J. Heinz (NYSE:HNZ), citing both "new product lines" that may increase sales, and "pricing gains" that will boost margins on those sales. The banker says 2008 "is shaping up as the best pricing environment in over a decade for large-cap branded food" in general, and Heinz's "pricing gains should stick and boost fiscal 2008 earnings per share."

Readers of newspapers might wonder about Citigroup's logic here, however. After all, the "pricing environment" Citigroup lauds comes with a significant downside. Food prices are skyrocketing, but not because food makers have some magical new ability to command premium prices. The reason is corn. Pervasive in our food system, the grain makes up a significant portion of most items in and around your refrigerator. At Heinz in particular, it's both the No. 3 and No. 4 ingredients in the firm's trademark ketchup, in the forms of high fructose corn syrup and corn syrup. The rising price of corn -- a raw material that Heinz must buy to make its own products -- is one of the most significant drivers of the food "pricing gains" that have Citigroup so excited.

Recognizing this, we're faced with a question: Does Citigroup really "get" what's driving Heinz's "pricing gains," and is it factoring this into its valuation? Or is the banker just reading the price label and jumping to conclusions? For clues to Citigroup's insight, we turn once again to Motley Fool CAPS to learn how well its past predictions have played out:

There we see that, while far from the world's best stock picker, Citigroup still commands an All-Star ranking with a CAPS rating of 86.97. On the other hand, the firm's record of making correct calls is, well, a bit less encouraging. I know this sounds harsh, but its sub-50% accuracy rating means you're statistically better off flipping a coin for your investment decisions than paying Citigroup to make them for you.

To illustrate, let's look at three calls that Citi made right ...

and another trio where Citi went badly astray:

If Citigroup is slightly more often wrong than right in its predictions, how does it wind up with a CAPS rating that beats four out of five investors? As demonstrated in the sampling shown above, although Citigroup picks roughly as many winners as losers, its winners tend to soar somewhat more than its losers suffer.

Heads or tails
But that still leaves us with the question: Will Heinz turn up heads or tails for Citigroup? Will it be one of Citigroup's substantial losers, or one of its even more sizeable winners? I suspect the latter. I'm not just saying this because we've also recommended Heinz over at Motley Fool Income Investor. (However, since the newsletter service has a record of outperforming the S&P 500 by a good seven percentage points, the odds do seem to favor any of its picks.) Instead, as a dedicated student of the (super)market, I've noticed that in inflationary times such as these, grocery prices tend to rise just as Citigroup predicts Heinz's will.

Moreover, when raw-material costs cycle back down, grocery prices rarely follow suit. It's just too easy -- and too tempting -- for food manufacturers to hide absolute price increases behind the veil of rising raw material costs. And by the time raw material costs have receded down again, consumers who've become accustomed to the new, higher prices fail to notice when they don't return to "normal."

For that reason, I'm holding my nose and casting my lot with the Wall Street Wise Men today. I think Citigroup's right -- Heinz is probably a buy.

Still not convinced?
Citigroup's upgrade, Income Investor's recommendation, and my own reluctant endorsement still haven't convinced you to buy the stock? You want a fourth opinion before making your decision? Sheesh!

Very well. If that's the case, you're actually in luck. We just so happen to have identified the investor with the single best record on Heinz. Visit the company's CAPS page and find out whether this mystery investor thinks the stock's still a buy.

If you're still unconvinced after considering all these opinions, feel free to pick up a copy of Income Investor on your way out. With more than six dozen recommendations in our portfolio, I'm sure there's something in there you'll like even better.

Fool contributor Rich Smith does not own shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's ranked No. 1,001 out of more than 29,000 rated investors. Embraer is a Motley Fool Stock Advisor pick, and Unilever is an Income Investor choice. The Fool has a disclosure policy.