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 to account. 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.
Speaking of the best...
Yesterday morning, Switzerland's Credit Suisse crunched some numbers on the world's two leading number-crunchers, McGraw-Hill (NYSE: MHP) and Moody's (NYSE: MCO), and decided to downgrade 'em both. In McGraw-Hill's case, Credit Suisse's downgrade was limited to simply removing its buy rating, telling investors to hold the stock instead. Moody's took a harder hit, however, downgraded all the way from neutral to sell.
"Why's that?" you ask. You thought Swiss bankers liked money? Well, they do. And it's true that both McGraw-Hill's Standard & Poor's (S&P) subsidiary and Moody's make a lot of money by analyzing how much money other companies make (and how much debt they can safely carry). But that's the root of Credit Suisse's reasoning. It argues that both S&P and Moody's have benefited mightily from the U.S. housing boom (bubble?), the mortgages issued to finance it, and their ability to sell ratings services on the "collateralized-debt obligations" (CDOs) into which housing mortgages are packaged.
Credit Suisse thinks that with the housing market going belly-up and subprime borrowers defaulting on their mortgages, investors will shun CDOs tied to those mortgages -- and with them, S&P's and Moody's CDO ratings services. There you have the reason for Credit Suisse's twin downgrades: It sees a primary driver of both raters' business drying up.
Is Credit Suisse overreacting? I mean, both S&P and Moody's are money-printing machines. It seems unlikely that a few subprime defaults in a single country can overturn their corporate apple carts. To get a better feel for how good Credit Suisse is at what it does, let's go to Motley Fool CAPS, where (deep breath ...) we rate the bankers who rate the companies that rate the debt of other companies. (Whoo. Exhale.)
In CAPS, we see that Credit Suisse sits nearly atop the heap of investment bankers, with a sterling 99.47 rating -- putting it not just in the top 10% of Wall Street analyst houses, but the top 1% of CAPS players overall.
Here are a few of the picks that got Credit Suisse where it is today:
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CS says:
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CAPS says (out of five):
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CS's pick beating S&P 500 by:
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Gartner (NYSE: IT)
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Outperform
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**
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31 points
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Rockwood Holdings (NYSE: ROC)
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Outperform
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****
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28 points
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Cognizant (Nasdaq: CTSH)
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Outperform
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***
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26 points
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On the flipside, here's a couple of calls Credit Suisse probably wishes it could do over:
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CS says:
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CAPS says (out of five):
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CS's pick lagging S&P 500 by:
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Hewlett-Packard (NYSE: HPQ)
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Outperform
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**
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3 points
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Google (Nasdaq: GOOG)
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Outperform
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*
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10 points
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All in all, Credit Suisse has put together a standout performance rating stocks, but how's it done on McGraw-Hill and Moody's in particular? Well, the record is mixed. During the nearly three years Credit Suisse has maintained a buy rating on S&P parent McGraw-Hill, the stock has outperformed MHP's own S&P 500 index 73% to 33%. On the other hand, Credit Suisse fumbled the ball on Moody's. Initiating coverage with a "hold" rating in August 2002, Credit Suisse sat out a terrific run that saw Moody's stock rise 166%, against just a 62% gain in the S&P 500 over the next four and a half years.
I'm guessing, therefore, that Credit Suisse doesn't subscribe to Motley Fool Stock Advisor. If it had, its analysts might have seen that Stock Advisor analyst Tom Gardner recommended Moody's in April 2002 -- four months before Credit Suisse started its own coverage, and in time to take part in the market-stomping gains of 229% that we've racked up since. (And that's not even our best pick. Over the years, we've made nine other recommendations that did even better. Click here to claim a free trial and see them all.)
While Credit Suisse missed out on Moody's four years ago, it's aiming to redeem itself with yesterday's sell rating -- and to husband its gains on the more prescient McGraw-Hill pick as well. Is that Wise? Is it Foolish? You tell us. Click on over to CAPS and see what 279 other investors have to say about Moody's and S&P. Review their ratings, read their arguments, and then tell us where you think the companies will go from here.
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 48 out of more than 23,000 raters. The Fool has a disclosure policy.
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