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 ...
All-Star analyst Bernstein initiated coverage of several of the best-known names in retail this morning. Calling "macro-economic indicators ... too inconclusive" to say for sure that we're heading for recession, but predicting a "slow" holiday season, Bernstein split its vote within the broad sector, attaching outperform ratings to Target (NYSE: TGT  ) and J.C. Penney (NYSE: JCP  ) , while labeling Kohl's (NYSE: KSS  ) , Costco (Nasdaq: COST  ) , and Wal-Mart (NYSE: WMT  ) mere "market performers."

Why did some of the stores get buy ratings, and others mere holds? Valuation doesn't seem to have been Bernstein's prime focus. For example, top-rated Target sells for 18 times trailing earnings, while lower-rated Wal-Mart commands only a 15-times multiple. Valuation wasn't completely ignored, however. J.C. Penney sells for only 11 times trailing earnings, after all, while lower ranked Kohl's costs almost 40% more, relative to its earnings.

But we don't necessarily need to know the precise reasoning behind Bernstein's analysis to get a feel for how likely it is that the analyst is right. Through the magic of Motley Fool CAPS, we can rewind history and examine the analyst's record to see how its past picks have fared. Chances are, if it's done well before, it can do well again.

Let's go to the tape
Turning to CAPS, we find that with a CAPS rating of 88.03, Bernstein may not be the best stock picker we've ever come across, but it's still pretty darn good. Perhaps even more important than its raw score, though, is its record for accuracy. With an accuracy rating verging on 67%, Bernstein is right nearly twice as often as it's wrong. While Bernstein has little or no track record in retail, it has shown remarkable skill in picking out-of-favor tech stocks, for example:

Company

Bernstein Said:

CAPS Says (Out of 5):

Bernstein's Pick Beating S&P By:

Google (Nasdaq: GOOG  )

Outperform

**

26 points

Salesforce.com (NYSE: CRM  )

Outperform

*

16 points

Valuation check
With its demonstrated record of success in tech, investors have at least some basis for heeding Bernstein's advice in the retail sector. But focusing on the valuations, I think I would switch the ratings around a bit:

Company

P/E

Projected Growth Rate

PEG

J.C. Penney

11

15%

0.7

Kohl's

15

18%

0.8

Target

18

15%

1.2

Wal-Mart

15

13%

1.2

Costco

28

13%

2.2

Using the ultra-simple PEG rule for valuation, where we look at both the price relative to earnings, and the P/E relative to anticipated growth rates, I agree with Bernstein that J.C. Penney deserves top billing today -- but I also like the prices at Kohl's.

On the Target-vs.-Wal-Mart debate, I actually agree with Bernstein that Target is the better company, even though the valuations are similar. And Costco? Much as I like the company, and much as I'd like to give it the thumbs-up -- since it's a Motley Fool Stock Advisor recommendation and all -- to me, it looks like the most expensive stock of the bunch. While I wouldn't necessarily sell a quality shop like Costco, I certainly won't be buying at these prices.


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