This Just In: Upgrades and Downgrades

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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 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.

Cemex sandbagged
If Cemex (NYSE: CX) investors are waking up this Monday morning feeling like they just got hit by a cement truck, there's a good reason for that. Last week was a rough one, as two heavyweight Wall Street banks weighed in with downgrades on the stock. First, Morgan Stanley (NYSE: MS) labeled Cemex a sell (actually an "underweight") on Wednesday. A day later, a different Morgan -- JPMorgan this time -- was only a little kinder in knocking Cemex down to "neutral." The two downgrades helped to pile drive Cemex for a near-8% loss on the week. But why?

Morgan Stanley explained its rating thusly: "Cemex is exposed to the weakest regions in countries like Spain and the United States, which look unlikely to rebound near-term." JPMorgan echoed its brother: "Demand for cement and aggregates is declining in several U.S. states where Cemex has a large presence." What's more, JP expects this decline to continue "through 2009."

Um, duh
So it would appear that Wall Street has awakened to the fact that there's a housing downturn afoot. And worse, because house values affect tax receipts, and tax receipts support infrastructure spending, demand for cement and aggregates for road, bridge, and related projects will also slump.

Of course, the rest of the investing world knew this already -- and had already accordingly bid Cemex shares down long before last week's downgrades. A Fool can be forgiven for wondering whether these two Johnny-come-lately bankers know something (or indeed, anything) we don't.  

Let's go to the tape
Fortunately, we don't have to limit ourselves to wondering. One of the two bankers at least (JPMorgan) regularly reports its ratings to Briefing.com, which forwards them to us. And we've been tracking the performance of JP's picks and pans for nearly two years now. Let's see how it's fared on a few stocks with particular exposure to the housing and construction industries:

Company	JPMorgan Said:	CAPS Says (5 max):	JPMorgan's Pick Beating S&P by:
Deere (NYSE: DE)	Outperform	****	70 points
Headwaters (NYSE: HW)	Underperform	****	30 points
HouseValues	Underperform	*	47 points

So far, so good. While I suspect the Deere pick has more to do with that company's agricultural operations, Deere makes a fair share of sales to the construction and forestry industries, too. The Headwaters and HouseValues "sells" may have been no-brainers, but JP had to walk a particularly fine line on Deere.

That said, JP veered way off the mark on other companies exposed to the housing downturn:

Company	JPMorgan Said:	CAPS Says (5 max):	JPMorgan's Pick Lagging S&P by:
Terex (NYSE: TEX)	Underperform	*****	23 points
Home Depot (NYSE: HD)	Outperform	**	25 points
Caterpillar (NYSE: CAT)	Underperform	****	40 points

Overall, JP continues to boast a strong record on Motley Fool CAPS. While it wins no great awards for accurate guessing, since only 52% of its recommendations beat the market, that's still good enough to outperform nearly nine out of 10 investors. Is that good enough to earn your confidence?

After considering the analyst's record, and also Cemex's numbers, it's good enough for me. After all, unlike Morgan Stanley, JP isn't saying you should sell Cemex necessarily -- just hold onto it and see how the situation with the housing crisis develops.

I agree. Sure, Cemex looks cheap today at 8.3 times trailing earnings. Then again, most analysts don't expect those earnings to grow much faster than 4% per year going forward. While there's no doubt that Cemex is a superior company (it earns operating margins more than 50% higher than the average cement company), and little doubt that it will reward investors over time, I don't see that growth rate offering any immediate benefits, or any compelling need to buy the stock right now.

Foolish takeaway
Wake me when it hits $23, and I may be feeling more optimistic about the valuation.