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 only tell you what the analysts said. We 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 track the long-term performance of Wall Street's best and brightest -- and worst and sorriest, too.

And speaking of the best ...
No sooner had Caterpillar (NYSE: CAT  ) scratched out another superb quarterly report last week than Bear Stearns emerged from winter hibernation and upgraded the stock to "buy."

Despite its reservations over Caterpillar's plans to spend more on research and development, and invest more in expanding capacity, Bear took the long view yesterday. Arguing that "lower expected interest rates are likely to be supportive of economic activity going into 2009," and finding strength in Caterpillar's sales to others besides the U.S. and European housing industries, Bear argued that in the long term, the shares look attractive. I agree.

Before I explain why I think this stock is the CAT's meow, though, let's take a stroll down Memory Lane and find out how well Bear Stearns has performed in this sector.

Let's go to the tape
We find that this analyst places in the top 12% of CAPS investors (by a whisker). Despite its relatively unimpressive 51% record for accuracy, the company does well enough on its winners to more than offset losses on its nearly-as-numerous losers.

Bear seems particularly adept at picking winners in CAT's own heavy industrial sandbox:

Company

Bear Stearns Said:

CAPS Says:

Bear Stearns' Pick
Beating S&P by:

Deere & Co (NYSE: DE  )

Outperform

****

60 points

Fluor Corp (NYSE: FLR  )

Outperform

****

25 points

Eaton Corp (NYSE: ETN  )

Outperform

***

5 points

More, at any rate, than in sectors such as the automotive industry, where more of its guesses come up losers:

Company

Bear Stearns Said:

CAPS Says:

Bear Stearns'
Pick Lagging S&P by:

CarMax (NYSE: KMX  )

Underperform

****

17 points

Ford (NYSE: F  )

Outperform

*

9 points

Daimler (NYSE: DAI  )

Outperform

*

7 points

Foolish takeaway
To recap, we have three points in favor of Bear's Caterpillar upgrade today:

  • The analyst's generally good record as a stock picker
  • Its strong record with heavy industrial picks
  • And ...

The valuation of Caterpillar itself. Will Caterpillar thrive or fail in 2008? Danged if I know. Maybe the overall economy here in the U.S. will drag it down; maybe the fact that Caterpillar makes more sales abroad than it does at home will save the company from a U.S.-centric slowdown.

I do know that at today's price, the shares look attractive as catnip -- as long as you're willing to invest for the long term. The market currently values Caterpillar at just 13 times trailing earnings, and less than nine times trailing free cash flow. That seems absurdly cheap for a company that most analysts agree will grow its profits at better than 16% per year over the next five years.

Bear ain't whistling Dixie here, folks. Caterpillar is a buy.


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