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 ...
Like the teens experiencing their first high-school crush, there's nothing so cute as bankers in love. Early this morning, recurring CAPS outperformer Calyon Securities upgraded its feelings for fellow financier Capital One (NYSE:COF) from "like" to "love" -- actually, "add" to "buy," but that's not nearly as poetic.

While Calyon didn't explain the reason for its upgrade (can love really be reduced to words?), I'll go way out on a limb here. I'll say it probably had a little something to do with the fact that Capital One bit the subprime bullet yesterday, shut down its GreenPoint Mortgage unit, and sent 1,900 employees packing in the process. Citing "reductions in demand and pricing in the secondary mortgage markets," Capital One decided it could no longer fill its wallet adequately from originating and immediately selling the mortgages out of this wholesale shop. Putting a period on GreenPoint will cost Capital One $2.15 per share after tax this year and will reduce guidance to about $5 per share. But on the plus side, it will (a) prevent further losses should the secondary mortgage markets deteriorate further, and (b) remove a healthy dose of worry that analysts had been carrying over how big such further losses might be.

Which just goes to prove the not-yet-old adage: A dead bird in the hand smells a whole lot better than two rotting behind a bush.

Great minds think alike?
I hesitate to compare myself to Calyon, which on several occasions in the past has claimed for itself the title of absolute best financial analyst on Motley Fool CAPS. But I must say -- I've been eyeing Capital One for a while myself. The stock's been on a tumble all through this mortgage mess, but back when it was all credit cards, all the time, Capital One was quite a hero of a stock.

Then again, popularity and competence don't always go hand-in-hand, right? You certainly shouldn't run out and buy a stock on my say-so alone, or even the say-so of both Calyon and myself. Not without checking our records, at least. Mine's right here, but what about Calyon's? Well, that's precisely what we're going to look at today -- how good of a stock picker is Calyon?

Let's go to the tape
Pretty darn good. While the banker has temporarily relinquished the top slot among Wall Street's Best among the firms we track, it still boasts a sterling CAPS rating of 91.79, a 52% accuracy record, and the rank of CAPS All-Star. Reviewing the firm's record, we find it's done well by recommending:

Now, you may be wondering why I italicized the word "temporarily" above. The reason -- Calyon has had a run of bad luck recently, with seven of its 10 most recent picks lagging the market. For example:

Like Ben Graham famously said, in the short run, the stock market is a popularity contest; in the long run, it's a weighing machine. Calyon seems to be suffering from the ill effects of recommending that people buy disfavored stocks -- however, the company's long-term record of outperformance suggests that if given enough time, these last three picks, too, shall turn from red to green, and Calyon once again will attain "Wall Street's Best" status.

And what suggests otherwise?
You see, Calyon has a history of liking Capital One -- a history that has not worked out so well, as the subprime-mortgage crisis gathered steam. In fact, Calyon's earlier "add" rating, which on CAPS we interpret as equivalent to an "outperform," has already cost Calyon 22 points of underperforming the S&P over the past 10 months.

If the converse of the old saw holds truer than the saw itself -- if, in other words, "past underperformance is some kind of guarantee of future failure" -- then Calyon's increased confidence in Capital One should be taken as a contrarian indicator, and you should sell when Calyon says to buy. Personally, though, I'm sufficiently impressed with Calyon's overall record, and with Capital One's reasonable valuation (a forward price-to-earnings ratio of 14, with profits expected to grow at 11%-plus over the next five years), to forgive Calyon its temporary underperformance. I cast my vote in favor of banker love and agree with Calyon's endorsement of Capital One.

Two opinions not enough for you? You need more information before deciding whether Capital One is a buy? Not a problem. Click here to see what the current CAPS score leader on the stock has to say about it. Just don't be surprised when you find the best predictor of Capital One's performance is not a professional analyst at all, but an ordinary individual investor like you and me.

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. 173 out of more than 60,000 players. The Fool has a disclosure policy.