This Just In: Upgrades and Downgrades

Here 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'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 ...
Do banks frighten you? Do you fear what lurks within the deepest recesses of their balance sheets -- subprime mortgages, CDOs, or (gasp!) currency bets on an appreciating U.S. dollar perhaps? Well, take heart, dear investor, because this morning, Deutsche Bank has pronounced one of the biggest U.S. banks a "buy."

Yes, early Tuesday morning, Deutsche took a good, hard look at the balance sheet of Wachovia Bank (NYSE: WB), raised eyebrows at the firm's dividend cut, nodded approvingly at the $8 billion capital infusion, and opined in guttural Teutonic tones, "While management seemed to recognize the problems later than we would have liked, the moves nevertheless seem like the first steps to its road to recovery."

With characteristic Saxon conservatism, Deutsche termed Wachovia's loan losses "reasonable," claimed its exposure to credit cards was not "significant," and concluded that Wachovia looks like a "decent regional bank."

Logically, it's hard to imagine what would be better at evaluating whether a bank is any good than another bank. But let's quality-check that conclusion.

Let's go to the tape
According to CAPS, Deutsche is one of the better bankers out there, stock-picking-wise (although at times, that seems a backhanded compliment). Deutsche boasts a record of only 52% accuracy, but its bets pay off big enough to rank this banker in the top 10% of investors.

Within the financial realm, Deutsche has shown proficiency on both the long and short sides of things:

Which is not to say Deutsche hasn't made its share of fantastisch Fehler as well. For example:

But on balance, the farther you move from the world of investment banking, and the closer you approach the kind of retail banking in which Wachovia specializes, the better Deutsche's record looks.

One out of three ... ain't bad?
My rule(s) of thumb in evaluating banks is divided into three parts. You want to buy a bank when it has:

• Return on equity greater than 20%
• Return on assets between 1.5% and 2%, with more being better
• A price-to-tangible book value of less than 2.0.

And there's no two ways about it -- Wachovia fails miserably by this yardstick. Return on equity here sits sub-5%, and return on assets is less than 0.5%. Really, the only element that seems to argue in Wachovia's favor is the price. At 29 bucks and change, these shares are selling for barely more than two times the banker's tangible book value.

So the question of the day is: Do you buy Wachovia based on its book value alone -- when every day seems to bring a new headline announcing a bank writing down its book?

Deutsche says jawohl, but if the idea of buying a bank on its book makes you nervous, I can't blame you. It gives me chills, too.