This Just In: Upgrades & 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 tell you what the analysts said and stop there. No, we're here to hold Wall Street accountable. We're going to tell you what the analysts said, then show you whether they know what they're talking about. Helping us in this endeavor will be 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 ...
As the markets prepared to close for the weekend on Friday, two heavy hitters of the financial world -- Prudential and Bear Stearns -- weighed in on diversified industrial manufacturer Eaton (NYSE:ETN). Their unanimous verdict: Eaton's a buy.

These ratings came shortly after Eaton's analyst conference on Thursday. There, Eaton reminded Wall Street of its 2006 performance (sales and profits both up by double digits, and operating cash flow rising more than twice as fast as sales at 26%), and outlined its objectives through 2010. The firm aims to get its return on capital up to 15% (from 11% today), boost its free cash flow margin to 9%, grow sales at 10% per year, and increase profits by15%. Heady stuff, and apparently the analysts bought it completely.

But should you?
That's really the question, isn't it? Not just "should you buy Eaton's company line?" -- if you're of a mind to, you can easily go to Eaton's website, listen to the several-hour-long presentation (make sure to take notes), and decide for yourself. But the reason we have analysts in the first place is to save us this kind of drudgery -- making the real question "should you trust Prudential and Bear when, after listening to what Eaton had to say, they say they think the stock's a buy?"

When making that decision, CAPS proves its worth by helping you to research the performance of these two firms, both on Eaton in particular and other stocks in general. Let's see how the two firms stack up.

Survey says ...
Right out of the gate, we see that Prudential's opinion should carry significantly less weight with investors than Bear Stearns'. For one thing, Prudential has only been following Eaton (with a neutral rating) since September of last year. In contrast, Bear has been at this since June 2003. Maintaining a buy rating on the stock for most of the period from July 2003 through August 2006, Bear racked up a 40-point margin of victory over the S&P 500, with Eaton's stock rising 68% versus a 28% gain for the broader market.

Turning from Eaton in particular to stock jockeying in general, Bear Stearns maintains its lead over Prudential. Bear's 96.58 CAPS rating puts it in the top 5% of the 23,000-plus investors we track. Prudential, in contrast, scores a lowly 77.53, putting it just barely in the top quartile. Let's review a few of the picks that got these two bankers where they are today:

Meanwhile:

Longtime readers of the Fool will recall that I've liked Eaton since I first began watching it in the summer of 2005. So it will come as no surprise when I say that, Prudential's support notwithstanding, I agree with the analysts that Eaton looks good here. Most analysts seem to think the firm can manage just 10% earnings growth over the next five years -- below industry average estimates, by the way -- but I disagree. I think that management's commitment to grow earnings at 15% long-term is achievable, and it makes the firm's trailing P/E ratio of 14 look more than reasonable. Not cheap, mind you, but reasonable.

So there you have it, folks. You clicked into this column looking for one analyst's opinion, and here we've given you three. But if that's not enough -- if you're looking for a fourth opinion -- then you're in luck. CAPS will show you who's got the best record of all on Eaton. (This mystery stock picker, by the way, may not work on Wall Street, but he is the No. 5-rated player on CAPS. If there's one person whose opinion you should listen to, it's his.)

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 68 out of more than 23,000 raters. Disney and UnitedHealth are Motley Fool Stock Advisor picks. UnitedHealth is also an Inside Value choice. XM Satellite used to be a Rule Breakers recommendation. The Fool has a disclosure policy.