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 its worst and sorriest, too.

And speaking of the best ...
Investment-banking powerhouse JPMorgan singlehandedly deflated a rumor-fueled rise in the shares of Netflix (NASDAQ:NFLX) yesterday. After waving away suggestions that Amazon.com (NASDAQ:AMZN) was interested in buying the DVDs-by-mail pioneer as "unlikely due to value concerns and competitive challenges," JP proceeded to diss Netflix as an independent business. Said the analyst, "Netflix at best will split growth in online video rental subscribers with Blockbuster (NYSE:BBI)," which is using its Blockbuster Total Access program -- a hybrid of DVDs-by-mail and in-store rentals -- to siphon customer growth away from Netflix.

JP admits that the program is a money-loser for Blockbuster and that the company will almost certainly have to raise prices to stem the bleeding -- thereby permitting Netflix to either compete on price, or raise prices in tandem. But predicting that Blockbuster will implement "only a $3 rate hike," JP opines that this is "not enough to tip the competitive balance back to Netflix." Long story short, JP downgraded Netflix to "underweight."

I've got my own thoughts on the phenomenon of a $172 billion-market-capped investment bank dismissing a $3 rate hike as irrelevant -- but I'll put those on the back burner for a moment. Before addressing them, let's take an objective look at JP's record and see how well it's done with a few similarly pessimistic calls in the past.

Pretty good. But JP's made a few blunders when it gave stocks the thumbs-down as well:

Meanwhile, back at Netflix ...
Overall, JPMorgan does a fine job of picking stocks. With pick accuracy verging on 53% and a combined rating of 90.52 in CAPS, where we track its calls, the banker sits among the top 10% of players on CAPS. Yet I disagree with its Netflix call so much, I could just spit. "Only a $3 rate hike"? "Not enough to tip the competitive balance?"

Where were these guys in 2004? I don't know about JPMorgan, but I vividly remember the price wars waged among Netflix, Wal-Mart, and Blockbuster back then. I remember Netflix's own summer 2004 rate hike being blamed for contributing to 422,000 cancellations in a single quarter. I remember the heated debate among fellow Fools Rich Duprey, Rick Munarriz, and Yours Fooly over whether Netflix could earn a profit on $14.99 a month, whether it needed to stick with $17.99 a month, and whether $21.99 was too far, too fast. Not to mention the PR disaster of raising its monthly subscription price by a few bucks one day, and then about-facing and dropping it back down when it realized that Blockbuster and Wal-Mart might steal its customers.

Virtually every scenario we looked at, every change in price that inspired gallons of virtual ink to be spilled upon these Web pages, hinged on a price change of $3, $4, or less. Before I build up into too much of a rant here, let me just stop and say this plainly: Yes, JPMorgan, a mere $3 rate hike can "tip the competitive balance." You don't need to predict the future to see that. All you need do is remember at the past.

And speaking of the past, Motley Fool Stock Advisor members will remember that this month marks the fourth anniversary of David Gardner's first recommendation to invest in Netflix -- a recommendation that's been repeated four times since. Thanks in large part to the near four-bagger of that initial advice, the five-time Stock Advisor pick has netted our subscribers an average of 72% returns per pick. Pick yourself up a free 30-day trial to Stock Advisor, and join David on his quest for the next big thing today.

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. 458 out of more than 30,000 rated players. Amazon.com and Bed Bath & Beyond are Stock Advisor picks. Wal-Mart is an Inside Value choice. The Fool has a disclosure policy.