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 worst ...
In my mind's eye, I see analysts from all the best Wall Street firms chuckling as they walk into their local Starbucks this morning. There, they meet the Avondale Partners analyst who yesterday downgraded Visa (NYSE:V). That analyst asks his colleagues what’s so funny, and the reply comes back so snappy you know they were just waiting to be asked: "So how does it feel to be a contrarian indicator?" You see, Avondale knocked Visa down to a "market perform" rating yesterday. And in response, the stock leapt 2% -- on a down day for the market.

Doh!
Yeah, basically, investors dissed Avondale. But can you blame them for zigging when Avondale says "zag"? After all, the analyst is just a whisker shy of placing in the bottom 20% of investors as ranked by CAPS. It guesses right on its stock picks only 46% of the time, and within the financial sphere where Visa dwells, it has an absolutely miserable record.

Out of 67 active picks tracked on CAPS, I struggled to find even a single financial-ish firm recommended by Avondale that was outperforming the market. (Granted, the one I did find is admittedly a doozy. Chinese banking software maker Yucheng Technologies  (NASDAQ:YTEC) has thumped the market average by 60 points since Avondale picked it.)

Finding examples of Avondale's missteps in the financial sphere, in contrast, is remarkably easy. Here are a few, submitted for your edification:

So, we’ve got one banking software specialist that's done almost as badly as Yucheng has done well; a financial news site that's trailing the market badly; and, most tellingly, three companies working in Visa's neck of the money-transfer woods -- disappointments, every one.

Blue clues
Then again, maybe investors shouldn't be too upset about Avondale's performance. Reviewing Avondale's website, it seems some analysts tasked with keeping tabs on the financial industry spend a fair chunk of their time covering ... "Corrections & Privatization." (Insert obligatory "all bankers are crooks" joke here.)

Fair's fair
In short, there's good reason for investors to be skeptical of Avondale's endorsements -- and its withdrawal of them. All kidding aside, though, the analyst does deserve some credit on Visa. Prior to pulling its buy rating yesterday, Avondale racked up a respectable 30 points' worth of market outperformance on the stock.

What's more, I actually agree with Avondale this time. You remember the quip about the proverbial stopped clock, right? It's correct twice a day? Well, I just happen to believe that Avondale, similarly, has been twice right on Visa: once when it told us to buy the stock 30 points ago, and a second time yesterday, when it presumably realized that this Visa bill is just too expensive. Here's why.

Earlier this month, Visa reiterated its long-term guidance, predicting it could continue growing earnings per share in excess of 20% per year. For the record, that assertion tallies with analysts' consensus expectations of 22% growth. Also for the record, analysts expect similar (21%) growth out of archrival MasterCard (NYSE:MA). And yet Visa shares currently command a multiple of 32 to next year's earnings (versus a still pricey, but less pricey, multiple of 26 for MasterCard). To me, it just doesn't make sense to ante up 32 times a guess at next year's number for a 22% grower.

Foolish takeaway
Is Avondale a genius stock picker? No. But fortunately, you don't need to be a genius either. Just visit CAPS for more than 3,500 opinions on Visa. Keep your wallet in your pocket, and don't buy this one till it goes on sale.