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 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 its worst and sorriest, too.

And speaking of the best ...
Take-Two Interactive (Nasdaq: TTWO  ) suffered a double hit-and-run in the middle of Wall Street yesterday. One day after announcing restated financial results for 2006, an announcement that included admitting to losing money in the last two quarters of the year, the maker of Grand Theft Auto was hit by two analyst downgrades -- first from Soleil Securities, and then from Citigroup.

Why downgrade now, you ask? In part, I suspect that the analysts were waiting -- as, indeed, we all were -- for the company to finish figuring out how its role in the stock-options backdating scandal affected its historical performance. Lacking reliable numbers, the analysts took the prudent course of withholding judgment. Now that the numbers are out, and now that everyone can see how awful they look, the firms are recoiling in horror and labeling the stock a "sell."

More important than Take-Two's "prior bad acts," though, was its prediction of more bad news to come. Take-Two guided investors to expect at best breakeven earnings for the current fiscal year -- far worse than the $0.47 per share in profits that most analysts were expecting. Both analysts cited this guidance in support of their sell ratings. Soleil went a step further; it added insult to its injurious sell rating by calling Take-Two a "poorly managed enterprise."

Indeed. But considering that Take-Two just admitted to a loss worth nearly 15% of its market cap last year, and doesn't expect to recoup any of it this year, Soleil's reaction is understandable.

The more important question is this: Is Soleil letting its disgust color its judgment about the stock's prospects? Is Citigroup? I mean, with all three of the new major gaming platforms -- the Xbox 360, PlayStation 3, and Wii -- now released to the public, isn't it likely that the owner of a franchise as popular as Take-Two's Grand Theft series will find a way to earn some money, sooner or later?

Let's go to the tape
I suspect that it will. But remember, analyst ratings generally look forward just 12 months. When Soleil and Citi tell you to sell Take-Two, they don't necessarily mean "forever" -- they're just saying the stock's not likely to outperform the market over the course of the coming year. To determine how likely it is that they're right on this point, let's take a look at their records.

Since we began monitoring the firms' performance six months ago, Citigroup has racked up an impressive record on CAPS -- its 98.00 rating places it in the top 2% of players. Although Soleil is right alongside Citi in downgrading Take-Two, however, its overall record lags far behind its rival. In fact, with a CAPS rating of just 59.23, Soleil's even losing to Jim Cramer! Here then, are a few of the picks that have raised Citigroup to its present heights in CAPS-land and have sunk Soleil to its present depths:


Citi Says:

(5 stars

Citi's Pick
Beating (Lagging)
S&P by:

AT&T (NYSE: T  )



10 points

Valero (NYSE: VLO  )



7 points

Southwest Airlines (NYSE: LUV  )



(20 points)



Soleil Says:


Soleil's Pick
Beating (Lagging)
S&P by:

Garmin  (Nasdaq: GRMN  )



8 points

Napster  (Nasdaq: NAPS  )



2 points

eBay  (Nasdaq: EBAY  )



(6 points)

Overall, Citigroup clearly has the better record of the two research houses. Yet the last time the firm made a clear call on Take-Two in particular, Citi blew it. Rating the stock an outperformer in July 2005, Citigroup managed to lose to the S&P 500 by a good 17 points in three months, before calling it quits and downgrading Take-Two to a hold in October. You should probably take that into consideration as well.

With both firms' track records to some extent suspect, you might want to get a third opinion before deciding whether to follow their advice. Here, too, CAPS can help. With just a click of your mouse, you can head over the boards and see not only how our 23,000-odd investors collectively feel about Take-Two, but also learn which Wall Street player currently has the absolute best record on predicting the stock's movements.

Once you're done, don't forget to claim a free 30-day trial to Motley Fool Stock Advisor, where David Gardner has identified two other game companies that he thinks will easily outperform not just Take-Two, but also the market as a whole. Just as with playing CAPS, the 30-day trial is absolutely free.

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 26 out of more than 23,000 raters. Garmin and eBay are Motley Fool Stock Advisor picks. The Fool has a disclosure policy.

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