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.

Brokers say the darnedest things
"Pretty please with sugar on top."
"I double-dare you."
"Cross my heart, hope to die, stick a needle in my eye."

On the schoolyard, children have developed their own special language for emphasizing the earnestness of statements. In this respect, Wall Street is similar to a hopscotch-chalked patch of playground asphalt. Case in point: Citing two recent contracts inked with Belarusian Potash and Indian Potash that set the price of potash at $625 a metric ton (a 130% increase over a previous price), RBC Capital Markets this morning predicted that shares of fertilizer-maker Potash of Saskatchewan (NYSE: POT) will hit $250 within the year. Then, to emphasize the point, RBC "crossed its heart" and upgraded the shares from "buy" to "top pick."

You'll put your eye out!
Continuing this morning's kindergarten theme, I have to question the wisdom of RBC's decision to double down on Potash by calling it a "top pick." After all, it's not as if this analyst is consistently right on its ordinary picks.

On the contrary, according to CAPS, where we've tracked the analyst's performance for more than a year now, RBC makes it into the top 20% of investors by a narrowish margin. This analyst's CAPS rating stands at 86.51, and it gets slightly more picks wrong than right. For example:

Still, in contrast to some of its peers on the Street, RBC is at least close to breakeven on its guesses. With a record of 49.4% accuracy, you know this analyst must have made some pretty good calls to counterbalance its blunders. Within the energy sphere in particular, RBC has picked:

In short, RBC has ridden the long-term trend of rising energy costs to a pretty decent record overall on CAPS. What's more, the analyst has called Potash well in the past. Its June 2007 endorsement of the stock has already outperformed the broader S&P 500 average by a good 117 points. But will it continue to do so?

Needling RBC
I have my doubts. As of this writing, Potash sells for a nosebleed valuation of 44 times trailing earnings -- even though analysts, on average, believe that the company will only increase its earnings at about 10% per year over the next five years. Yet here comes RBC, running with scissors as it were, eager to re-up on its past endorsement of a stock that now sells for a 4.4 PEG ratio, according to my calculations. What's more, that company's free cash flow has come in lower than net income for three years running.

I give credit where credit is due. RBC made a smart call on Potash last summer, and it deserves all manner of praise for its foresight. But perhaps it should also know when to take its chips off the table.

With at least part of the run-up in fertilizer prices dependent on a rush to grow corn for use in brewing ethanol -- an exercise that any economist can tell you is small-f foolish -- I see a real risk that RBC is pushing Potash at the very moment when sentiment is ready to turn against corn overproduction. If that happens, and if demand for fertilizer falls as a result, so too will Potash's stock.

And so I caution: Careful there, RBC. You'll put your eye out.