This Just In: Upgrades and Downgrades

• Email
• Share
• Print

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 ...
Wall Street starBear Stearns poured a thimbleful of salt into Motley Fool Stock Advisor members' morning coffee Wednesday, starting off the New Year with a growl aimed at Stock Advisor pick Starbucks (Nasdaq: SBUX). Citing higher food and labor costs on the one hand, and a weakening economy on the other, Bear downgraded the stock from "outperform" to "peer perform." According to the analyst, Starbucks' widespread popularity works as a double-edged sword; while expanding sales potential, it also exposes the firm to a less affluent customer base that may be unable to afford its costly caffeinated cocktails.

If this argument -- weak economy, weak restaurant sales -- sounds familiar, there's good reason. It closely resembles fellow megabanker JP Morgan's concerns upon initiating coverage of Buffalo Wild Wings (Nasdaq: BWLD) with an "underweight" last month. As you may recall, I disagreed with JP on that one, criticizing the banker's lackluster record on restaurant stocks. Is Bear any better?

Let's find out
From a big-picture point of view, Bear clearly outshines its Wall Street rival. With a CAPS rating in the top 10% of players and a record of 53% accuracy, it's among the best of more than 79,000 total CAPS participants. In Bear's "wins" column, we find:

Company	Bear Said:	CAPS Says:	Bear's Pick Beating S&P by:
Washington Mutual (NYSE: WM)	Underperform	*	73 points
McDonald's (NYSE: MCD)	Outperform	****	35 points
ExxonMobil (NYSE: XOM)	Outperform	****	13 points

However, I find Bear's losers even more instructive:

Company	Bear Said:	CAPS Says:	Bear's Pick Trailing S&P by:
Brinker (NYSE: EAT)	Outperform	**	25 points
Starbucks*	Outperform	**	20 points
Sonic (Nasdaq: SONC)	Outperform	****	7 points

*Last rated a buy in July 2007.

In short, Bear is a broker with a generally superior record that includes at least one good restaurant pick: McDonald's. However, I fear that Mickey D's is the exception that proves the rule at Bear Stearns. And as a rule, this analyst just isn't very good at picking restaurant stocks, going one-for-four on today's scorecard.

Foolish takeaway
So this is the part where I tell you Bear's an idiot, and you should buy Starbucks because we recommended it at Stock Advisor, right?

Actually, no. I sort of agree with Bear's hold-ish rating on this one, although I come at the issue more from a valuation perspective. With a trailing P/E of 23, and most analysts projecting 21% long-term profits growth, Starbucks sells for an entirely reasonable price -- but it's not a bargain just yet. Before switching over to full-blown bull mode, I'd want to see the price scared down just a bit more by the sort of short-term worries Bear is expressing.

In the long run, dairy prices will fluctuate back down, labor costs will be absorbed into the prices Starbucks charges for java, and consumers will weather the economic storm. Only in anticipation of such long-term trends would you want to buy this stock on Bear-ish sentiment.