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 the worst and sorriest, too.

Dueling bankers
It would be funny if it weren't so sad. As trading drew to a close last week, two of Wall Street's all-time worst stock pickers ganged up on one of its worst-performing stocks: Both Keefe, Bruyette & Woods and Piper Jaffray took advantage of a sizeable earnings drop by Capital One (NYSE: COF) as a cue to downgrade the stock.

Summarizing its reasons for downgrading Capital One to neutral, Piper pointed to Capital One's reservation of $1.1 billion for loan losses last quarter, and predicted that the No. 4 issuer of Visa (NYSE: V) and MasterCard (NYSE: MA) charge cards would have to write off another $6.9 billion in loan losses over the coming year. Piper did applaud C-1's decision to back away from the auto loans business.

For its part, KBW was more reticent about revealing its reasoning -- but since it dropped C-1 to an underperform rating, a Fool can presume that KBW's even less sanguine on the bank's prospects than Piper is.

Let's go to the tape
Now that we know what the analysts think, let's take a moment to review how well they think. According to CAPS, both analysts rank near or within the bottom 20% of investors, getting roughly three picks wrong for every two they get right. To illustrate how the analysts "earn" these rankings, let's review a few of KBW's recommendations in the financial sector:

So listen up, students. If you aspire to become a highly paid, well-respected Wall Street banker -- one with a CAPS record of being wrong far more often than right, and of underperforming the market by an average of about 3.65 points per pick -- this is how it's done. Just let KBW be your guide.

That wasn't very nice
You're right. I apologize. A record like this one, if not turned around, will ultimately lead an investment banker to Bear Stearns' fate, and I shouldn't be adding insult to injury.

And another thing ...
Of course, we've got more important tasks today than bashing bumbling bankers. We still have a stock to review. We've already discussed why KBW and Piper are down on Capital One. But what should you think about the stock?

From my perspective, you should like Capital One. Quite a lot, actually, and not just because the pair of contrarian indicator-analysts mentioned above hate it. I mean, Capital One is perhaps the most respected name in credit cards. It has superb customer service, fair rates, and the best commercials by far. More importantly:

• Capital One sells for a 12 P/E ...
• ... yet it's expected to grow its earnings at more than 12% per year over the next half-decade.
• Capital One sports operating margins 1,000 basis points better than the average in its industry...
• ... yet it's priced at a discount, with both its P/E and price-to-tangible book value ratios below the average of its peers.

Premium quality, discount price, and criticism from a pair of analysts with a subpar record for accuracy? I don't know "what's in your wallet," but I do know that Capital One should be in your portfolio.