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 worst and sorriest, too.

And speaking of the best ...
Last week, we discussed the rationale behind Citigroup upgrading General Motors (NYSE: GM  ) . Specifically, we mentioned one analyst's belief that negotiations with the United Auto Workers union over setting up a voluntary employees' beneficiary association (VEBA) trust could cut GM's sizeable obligations to cover employee health-care costs. Today, it's second verse, same as the first, as a different analyst upgrades a different automaker, Ford (NYSE: F  ) , for the same reason.

Early this morning, Citigroup peer Bear Stearns upgraded the shares of GM's rival automaker from "peer perform" to "outperform." Basically, this is because Bear thinks any benefits GM gets out of the UAW negotiations will accrue to Ford as well (GM's contract with the union is expected to serve as a model for subsequent UAW contracts with Ford and Chrysler), but Bear also cites "improving fundamentals" at Ford, namely improved free cash flow.

Let's go to the tape
We've already looked at Citi's pick and discussed why its strong record of stock-picking may not translate to outperformance on GM, because the specific analyst who picked the stock is so new to the firm. But what about Bear? Its auto analyst, Peter Nesvold, is no newbie, so presumably Bear's record is more representative of how well Nesvold's pick might work out.

Unfortunately, that record may pose a problem. Unlike Citi, which ranks in the top 10% of investors on CAPS, Bear is currently struggling just to stay in the top 20%. Its CAPS rating of 82.62, while qualifying it for "All-Star" status, does fall noticeably short of Citi's -- why, with an accuracy percentage of just 48%, Bear actually gets more picks wrong than right! For example:

Company

Bear Said:

CAPS Says (out of 5):

Bear's Pick Lagging S&P By:

Amgen (Nasdaq: AMGN  )

Outperform

****

27 points

Brocade Communications (Nasdaq: BRCD  )

Outperform

****

20 points

That said, Bear's winners do a good job of offsetting its losers:

Company

Bear Said:

CAPS Says:

Bear's Pick Beating S&P By:

Washington Mutual (NYSE: WM  )

Underperform

**

23 points

SanDisk (Nasdaq: SNDK  )

Outperform

****

22 points

Most instructive of all, of course, would be Bear's record within the auto industry itself. Unfortunately, the news there is just as mixed. The firm endorsed DaimlerChrysler (NYSE: DAI  ) only today (at least, this was the first time this pick has showed up on CAPS). Past picks on the other two U.S. auto majors in August 2006 went in opposite directions: a thumbs-up on Ford netted Bear seven points of outperformance before being closed out in October, and a thumbs-down on GM lost Bear five of those points over the same time span.

All in all, I have to say it looks like a wash to me. Bear as a whole has close to a 50-50 chance of guessing right. So do its auto analysts. In the end, I'm afraid we're on our own on this one. And as to whether you decide to buy Ford as Bear suggests, it depends a lot on whether you think a firm with no profits over the past year (and none expected next year) deserves your investing dollars. Personally, I'd advise against it, but to each his own.

Looking for a second opinion -- or in this case, a third? To find out what the CAPS player with the best record on Ford thinks about the matter, click here.


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