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 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 ... and then show you whether they know what they're talking about. Helping us in this endeavor will be CAPS, our tool not only for rating stocks, but also for rating the analysts who rate stocks. With CAPS, we'll be tracking the long-term performance of Wall Street's best and brightest -- and the worst and sorriest, too.

Speaking of the best ...
As markets moved higher yesterday, two stocks in particular got treated like a "gift" of coal on Christmas day. Peabody Energy (NYSE:BTU) and Consol Energy (NYSE:CNX) both suffered tumbling shares after they were hit with downgrades from London-based banking behemoth HSBC. (It reduced Peabody to "neutral," and Consol to "underweight.")

According to the investment bank, the whole coal industry has experienced a run-up since the beginning of this year, leaving many stocks overvalued. Peabody and Consol in particular have outrun even their sector, with the former rising 27% since Jan. 3, and the latter climbing 61% -- hence their singling out for punishment on Tuesday.

But here's the thing: HSBC left its "price targets" on both stocks in place, and confirmed that it still thinks the "long-term fundamentals" of this sector are "positive." HSBC expects the coal producers to enjoy even better pricing power next year as (1) utilities buy extra coal to shore up their supplies, and (2) consolidation within the sector continues, reducing pricing competition among a dwindling number of major players. So is now really the time to be issuing downgrades?

Let's go to the tape
For clues to how well HSBC does with its picks, we'll turn to Motley Fool CAPS for a glimpse at the banker's record.

When last we checked in on HSBC in April, it was moving up the rankings quite nicely, sitting within spitting distance (if Britons spat) of All-Star status with a 73.28 CAPS rating. But my, how things can change in CAPS-land! A series of stock-picking mishaps has laid waste to HSBC's record, which now stands at a lowly 33.04 as of this writing -- that's 21,727th place among 32,454 ranked players. HSBC isn't just out of the running for All-Star status -- it's at risk of falling into the limbo of an "Under 20" rating!

Examining the banker's active picks added since our April column, here's what we find:

It hasn't all been bad news for HSBC, of course. But the firm's few winners are having a hard time counterbalancing its losers:

Now let's rewind the tape even further, to examine a few of the recommendations on which HSBC has closed the books. We've unearthed fairly consistent underperformance when it comes to picking companies that dig stuff out of the ground. HSBC was down 10 points on Peabody before yesterday's downgrade. On gold miners Anglo-American, Anglo Ashanti, and Gold Fields, HSBC underperformed the market by three, five, and two percentage points, respectively.

Personally, I'm a bit underwhelmed by HSBC's record to date. But I have to admit I see the logic in this particular set of  downgrades. Trading for 22.5 times trailing earnings, with the analyst consensus pointing toward 20% long-term profits growth, Peabody doesn't look like a steal of a deal to me today. But a "hold?" Sure, I can see that. Conversely, Consol sells for about the same earnings multiple as Peabody, but Wall Street only expects it to produce 12% earnings growth. To me, that valuation looks, shall we say, a bit optimistic.

Looking for a second opinion on these stocks? You've come to the right place. Click the links below to see what the CAPS score leaders on Peabody and Consol, respectively, have to say about the companies today:

• Peabody
• Consol

Just don't be surprised when you learn that in each case, the best stock picker is no Wall Street wizard at all -- just an ordinary individual investor like you or me.

Fool contributor Rich Smith does not own shares of any company named above. You can find Rich on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 652 out of more than 60,000 total players. The Fool has a disclosure policy.