This Just In: Upgrades and Downgrades

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycles 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 ...
It's been a rough week for flash-drive maker SanDisk (NASDAQ:SNDK). Yesterday, arguing that buying SanDisk shares was "the wrong way to invest," Oppenheimer & Co. downgraded the stock from "buy" to "neutral." Needham piled on this morning with its own downgrade to "neutral."

More interesting than the downgrades themselves, however, was how the market reacted to them. Yesterday's dissing from Oppenheimer helped to push SanDisk's shares down a good 6%. Yet today's downgrade from Needham seems to have had the opposite effect -- the shares are up in response.

Which is strange, because when you review the two firms' records, Needham is clearly the better analyst. The firm gets the majority (make that bare majority, at 51% accuracy) of its stock picks right, and it boasts a CAPS rating among the All-Star elite at 86.75. In contrast, Oppenheimer gets most of its stock picks wrong and has a CAPS rating in the 29th percentile. In a non-bizarro world, you'd expect investors to take Oppenheimer's downgrade as a contrarian indicator and to get nervous only when they saw Needham agree with its laggard brother.

To further illustrate the difference between these two stock shops, let's take a look at a few of their best and worst recommendations:

And for Needham, we have:

Context matters
I don't see the above showing that Oppenheimer has any clear superiority in "tech" over Needham, which would explain why investors took the former's recommendation to heart while ignoring the latter's. Perhaps the real reason investors listened to Oppenheimer, and not to Needham, is as simple as this: Oppenheimer explained its reasoning, and Needham didn't -- at least not publicly, and at least not yet.

Whereas news stories on Needham's downgrade state simply that it happened, an Associated Press story on Oppenheimer's downgrade explains: Basically, the analyst sees SanDisk facing increased competition from Samsung and Hynix. Competition begets margin pressure and loss of market share -- and analyst downgrades. It's a logical argument, and investors seem to be buying it -- Oppenheimer's record of being somewhat less than consistently right notwithstanding.

Moral of the story
Listen up, Wall Street. If you want investors to listen to you, you've got to tell us the why behind your ratings. Do us this small favor, and even if your advice is lousy, we'll follow you docilely. Baaaaaa.