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 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 its worst and sorriest, too.

And speaking of the best ...
Like a storm swooping in out of a blue sky, Bank of America (NYSE:BAC) Securities initiated coverage on property and casualty insurer Montpelier Re (NYSE:MRH) this morning -- just in time for hurricane season. Pretty strange timing, considering the risk that any given hurricane season might bring a repeat of 2005's mammoth $753 million loss.

Now, there don't seem to be any headline-driven reasons for the bank's taking an interest in Montpelier (a company that the folks at Motley Fool Hidden Gems have been interested in since recommending it in April 2005). Nor do news reports shed any light on B of A's reasoning. That said, when I look at the bank's record, and Montpelier Re's valuation, I have to conclude that this is the right call to make.

Valuation
Compared to its peer property and casualty insurers, Montpelier Re looks priced to move. The stock carries a trailing P/E ratio of 5.2 -- nearly half the going rate in this industry. Nor is Montpelier Re a sufficiently weak player to justify a discount. On the contrary, the company's 53% operating margin puts the industry average of 19% to shame.

And what about relative growth, you ask? Looking over the estimates, I see Montpelier expected to underperform the industry next year, when low-single-digit growth is expected to prevail in the P&C world. Longer term, however, the stock looks to be a competitive bet, with five-year forward growth expected to come in at 12% against an industrywide expectation of about 11.3%. Long story short, B of A has the facts on its side when it endorses Montpelier Re.

B of A's record
To address the other half of the equation -- B of A's skill at crunching the above numbers and coming up with a correct guess as to where Montpelier Re's stock should be heading -- we turn to Motley Fool CAPS for an update on the bank's record. There we learn that the banker has fallen on hard times in CAPS Land, its CAPS rating plunging from a sterling 98.98 in early April to a merely admirable 91.64 today.

What stocks have been raining on B of A's parade? Picks like these:

Meanwhile, recommendations such as the following helped retain for B of A the title of CAPS All-Star:

Foolish takeaway
And yet, in spite of B of A's waning CAPS score, and in spite of the looming hurricane season, I happen to agree with the banker's call on Montpelier Re. Partly because of the valuation scenario I described above. Partly because of the arguments laid out in Montpelier Re's favor by Hidden Gems co-lead-analyst Bill Mann in his April rerecommendation of the stock: "Shareholders shouldn't cringe every time a storm lands, a tornado strikes, or a wave hits. Montpelier Re was created to handle these events. An environment in which the overall reinsurance market creates difficulties for the marginal players is a benefit to the good ones." (Claim a free 30-day trial to Hidden Gems, and you can read Bill's entire discourse on the company.)

But don't just take my word for it, or Bill's, or B of A's. Check out what the score leader for Montpelier Re has to say about the company. You can learn the identity of this mystery stock picker, and find out what he (or is it she?) thinks about the stock when you visit Montpelier Re's CAPS page.

Bank of America is an Income Investor pick.

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 currently ranked No. 1,059 out of more than 29,000 raters. Montpelier Re is also a Stock Advisor recommendation. InterMune is a Rule Breakers selection.