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 worst ...
It's rare to see an analyst say something utterly nonsensical. They may say things that upon careful consideration turn out to be irrelevant, misleading, or just plain wrong. But to come out and publicly spout complete and utter gibberish? That's a once-in-a-blue-moon event.

Well, guess what? On Tuesday, Friedman Billings Ramsey upgraded Starbucks (Nasdaq: SBUX  ) from market perform to outperform -- and the moon promptly turned blue. According to the analyst, Starbucks has "tipped the scales too far in favor of growth," saturating its home market, and overestimating its ability to expand internationally. As a result ... well, ask my Foolish colleague Alyce Lomax about the result. Starbucks is talking down analyst estimates, and talking up the need to start national advertising to persuade people to buy its addictive product. I mean, dag-gone, guys. Shades of Joe Camel!

But while FBR recognizes the bad news, the broker has a uniquely -- what's the word? -- ah yes, insane spin on it: "every piece of bad news means we are one step closer to some real drama." Simply put, FBR seems to be cheering for bad news out of Starbucks, on the theory that things need to get worse before they can get better, and that if things get really, truly awful, management will be inspired to do something to fix the problems, or sell the company.

Let's go to the tape
OK. Obviously, I don't agree with the analyst's take on this one. It starts off as a stroll down Counterintuitive Street, and quickly ends up somewhere in the Twilight Zone. But maybe FBR knows something I don't? There's only one way to find out. Let's check out its record on CAPS.

Friedman Billings Ramsey
CAPS rating: 26
Accuracy: 48%

Hmm. Not the best start. Seems in addition to getting most of its picks wrong, FBR isn't doing well enough with its correct calls to counterbalance goofs such as:

Company

FBR Said:

CAPS Says:

FBR's Pick Lagging S&P by:

California Pizza (Nasdaq: CPKI  )

Outperform

**

34 points

Domino's (NYSE: DPZ  )

Outperform

**

29 points

Cheesecake Factory
(Nasdaq: CAKE  )

Outperform

***

25 points

Granted, the analyst does get a few things right:

Company

FBR Said:

CAPS Says:

FBR's Pick Beating S&P by:

Microsoft (Nasdaq: MSFT  )

Outperform

***

19 points

Yum! Brands (NYSE: YUM  )

Outperform

*****

18 points

Sonic Corp. (Nasdaq: SONC  )

Outperform

****

4 points

But on balance, the conclusion is inescapable. FBR just plain isn't good at picking stocks. What's more, as I've shown above, it's even worse than usual when picking restaurant stocks.

Foolish takeaway
To be clear, it's only FBR's ditzy reasoning that I object to. Fact of the matter is, I wouldn't be surprised if Starbucks does outperform the market. For one thing, one of the brightest investors in the game, Fool co-founder David Gardner, recommended Starbucks to Motley Fool Stock Advisor members because he believes Starbucks knows a thing or two about success. For another, I don't think the stock is too unreasonably priced after its recent sell-off. Trailing earnings of 26 for a firm expected to grow at 22% per year for the next half-decade? It's not the cheapest stock on Planet Earth, but the dominant player in its niche probably deserves a bit of a premium multiple.

Still, my sneaking suspicion that rooting for Starbucks to fall flat on its face, and arguing that this will make the stock go up, won't do much to improve FBR's reputation. Even if the analyst is ultimately vindicated, and Starbucks does indeed outperform, the reasoning behind the rating will rob FBR of its glory.


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Related Tickers

9/30/2014 4:00 PM
SBUX $75.46 Up +0.19 +0.25%
Starbucks CAPS Rating: ****
CAKE $45.50 Down -0.46 -1.00%
The Cheesecake Fac… CAPS Rating: **
CPKI.DL $0.00 Down +0.00 +0.00%
California Pizza K… CAPS Rating: *
DPZ $76.96 Down -0.67 -0.86%
Domino's Pizza CAPS Rating: ***
MSFT $46.36 Down -0.08 -0.17%
Microsoft CAPS Rating: ***
SONC $22.36 Down -0.21 -0.93%
Sonic Corp CAPS Rating: **
YUM $71.98 Down -0.68 -0.94%
Yum! Brands CAPS Rating: ****

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