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 ...
It's been a little more than half a year since I took struggling 'Sylvanian stock picker Susquehanna International to task for what I judged an ill-considered endorsement of the nation's premier cruise lines, Carnival (NYSE: CCL) and Royal Caribbean (NYSE: RCL). Luckily for investors, it turns out that although I wasn't exactly right, Susquehanna wasn't exactly wrong. Royal Caribbean has lagged the market by four points since March, but Carnival took up the slack, rising four points. Essentially, it's been a wash.

Hoping to wring profits from that wash, Lehman Brothers posted a pair of upgrades today -- one each for Carnival and Royal Caribbean. All we originally knew was that the analyst liked both stocks, without a "why." It took several hours for major news outlets to report anything more than the upgrade itself. We were eventually told that it stemmed from an expectation of better booking trends in the Caribbean and Europe.

Let's go to the tape
Until we get some context, bare upgrades drive me nuts. What, are investors supposed to blindly buy stocks on an analyst's say-so? Or should we sell into the buying frenzy? It depends on why the analyst thinks the stock is worth buying; absent that, we can only go by the firm's reputation for making bright, if opaque, calls. Here, at least, Motley Fool CAPS can help.

Reviewing Lehman's CAPS profile, we see that it's got a much better record than Susquehanna does. Lehman gets a little more than half its picks right (why does the phrase "damning with faint praise" come to mind?), but gets them so right that even this near-coin-flipping performance has earned the banker a place among the CAPS All-Star elite. Lehman's current 88.30 CAPS rating has been secured in part by a series of two-plus-baggers, including:

Company	Lehman Said:	CAPS Says (out of 5):	Lehman's Pick Beating S&P by:
Foster Wheeler (Nasdaq: FWLT)	Outperform	*****	160 points
MasterCard (NYSE: MA)	Outperform	***	157 points
Research In Motion (Nasdaq: RIMM)	Outperform	**	149 points

Meanwhile, the other side of Lehman's flipped coin reveals picks such as:

Company	Lehman Said:	CAPS Says:	Lehman's Pick Lagging S&P by:
AMD (NYSE: AMD)	Outperform	**	66 points
Lennar (NYSE: LEN)	Outperform	*	59 points
US Airways	Outperform	*	60 points

Foolish takeaway
Call me stubborn if you will, but I think Lehman is just as wrong to endorse the cruise lines today as Susquehanna was seven months ago. I've been watching the valuations on these two stocks for months now, and I just don't see bargains. Each company sells for 17 times trailing earnings. Neither company carries an expected growth rate greater than its P/E -- analysts think Carnival will post 14% annual growth over the next five years, and predict only 12% growth for Royal Caribbean.

Free cash flow-wise, things look worse, not better. Carnival generates only a little more than half as much cash profit as accounting profit. Royal Caribbean is actually burning cash. So sorry, Susquehanna. Accept my regrets, Lehman. I think you're both wrong on both of these companies.