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 its worst and sorriest, too.

And speaking of the best ...
On Monday, one of the nation's biggest bankers dissed the second biggest corporation. Now, the good news here is that by this point, GE's (NYSE:GE) shares have fallen so far, and for so long, that the insult implicit in JPMorgan Chase's downgrading GE to "neutral" did little to add to shareholders' injuries.

And the bad news: JPMorgan is probably right.

Probably?
Statistically speaking, that is. Reviewing the analyst's record on CAPS, we find that JPMorgan ranks in the top 10% of investors we track, as a result of getting about 54% of its guesses correct ... sometimes, very correct. For example:

That's not to say JP hasn't made its share of blunders. For example:

On balance, however, JP's a fine analyst. It's usually right, if not always right. It picks big winners, often enough to more than counterbalance its losers. But into which category shall this most recent downgrade of General Electric fall?

The case against conglomerates
Well, let's see what JP has against GE. According to the analyst, GE is in for rocky times as U.S. airlines cut capacity -- and, hence, airplane purchases … and, hence, purchases of the GE engines that so often power said airplanes. The analyst further argues that GE's consumer-finance operations will suffer from the housing downturn and that NBC Universal will experience weakening advertising sales, while GE's industrial units will likewise lose wind in the economic doldrums.

Basically, there isn't a lot that JPMorgan does like about GE, and this leads the analyst to conclude: "For investors to ever get comfort, there needs to be more transparency, which would be accomplished probably only through a dramatic portfolio restructuring." Ultimately, JP wants GE to sell off its constituent parts, until all that remains of the company is a heavy-industry arm manufacturing power turbines, railroad locomotives, and the like, as well as a commercial finance business that services this business.

And the case for 'em
But the whole idea behind building GE up into a conglomerate in the first place was that by operating in numerous industries, the company could navigate tough economic times if one unit's successes could offset another's struggles. Putting all of GE's eggs in a single heavy-industry basket would defeat this purpose.

Moreover, it's not as if GE's heavy-industry operations are significantly more profitable than the bits that JP wants auctioned off. To the contrary, if you run down the numbers for last fiscal year, you'll find most every segment hitting close to 18% operating margins. When I look at the company, I just don't see a lot of deadwood that needs to be cut.

Foolish takeaway
To the contrary, I see a company that remains remarkably profitable across the board, selling for a sub-market price-to-earnings ratio of 13, expected to grow earnings in the low double digits for the next half-decade at least, and paying a generous 4.3% dividend all the while. To me, this all adds up to an argument for buying GE. not for downgrading it -- and certainly not for breaking up a winning team.