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 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...
One of the biggest names in stock-picking came out with an upgrade on Lockheed Martin (NYSE:LMT) this morning. Shifting out of "neutral" and into "buy," Merrill Lynch argued that the defense contractor has been unfairly punished by investors, who fear a slowdown in sales of F-16 fighter jets. While agreeing that slower Falcon sales will cost Lockheed perhaps $1 billion in sales next year, Merrill takes a longer view and argues that as the F-16 gives way to newer birds such as the F-35 Lightning II in 2009 and beyond, Lockheed is going to do just fine. Merrill expects the firm's aeronautics group to grow sales 8% in that year, followed by 16% in 2010, and 13% in 2011.

But storied firm-name aside, does Merrill really know what it's talking about?

Let's go to the tape
Merrill Lynch poses an interesting scenario to investors tracking the "experts" on CAPS. We monitor most professional stock pickers day by day, as they constantly update their recommendations. Merrill, in contrast, rarely releases its ratings to the public (at least not through Briefing.com, where we get our data). So for this stock picker in particular, here's what we've done (quoting directly from its CAPS profile): "Merrill Lynch highlights selected stocks to create the Merrill Lynch Focus 1 list. These stocks reflect Merrill Lynch's recommendations based on current economic and investment outlook or an unusual fundamental and/or investment development. A selected stock remains on the Focus 1 list for at least 12 months unless the Focus 1 committee removes a stock in conjunction with an analyst downgrade or otherwise. On CAPS, we track the group of Focus 1 stocks published to the public last May on the Merrill web site."

So in essence, we're calling Merrill's bluff: They put a stock on their "focus" list with a 12-month price target in mind -- we track the stock for the full 12 months. No calling mulligans and switching out underperformers for new picks. Restricting the firm in this manner may have affected its CAPS score, which, as you can see, is not particularly good: With precisely half its picks outperforming the market and the other half underperforming it, the best that Merrill's focus list seems able to manage is a 66.84 CAPS rating.

That said, it has called a few strong winners, such as:

And also a handful of losers, notably:

Foolish takeaway
As for Merrill's apparent endorsement of Lockheed and how it slipped out to the media today, I really don't know. It doesn't appear on the firm's mediocre "Focus 1" list, as far as I can tell. But perhaps that's a good thing, because on this one, I actually do agree with Merrill.

As I described in a column discussing United Technologies' recent share buyback last week, Lockheed isn't the cheapest stock in the defense industry, but it's far from the most expensive. In fact, as a multiple to free cash flow, only Boeing currently carries a lower valuation than does Lockheed. Cheap from a historical point of reference and destined to grow sales in what's already its largest segment by revenues? With a dual tailwind like that, long-term investors, who can wait out the next year's F-16-less turbulence, could find themselves flying high in a couple years.

Looking for a second opinion on Lockheed (or in this case, a third)? To find out what the CAPS player with the best record on the company thinks about it, click here.