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 ...
A little-known Wall Street shop, Pali Research, decided to broaden its coverage of the retail sector this morning, when it rated a lucky seven companies in the sector, including two Fool faves:

• Aeropostale (NYSE:ARO), Urban Outfitters (NASDAQ:URBN), bebe, Charlotte Russe, and Hot Topic all got kissed-by-a-cousin "neutral" ratings.
• Motley Fool Stock Advisor pick Pacific Sunwear (NASDAQ:PSUN) received the coveted "buy" label.
• Motley Fool Hidden Gems recommendation Zumiez (NASDAQ:ZUMZ) got tagged as a "sell."

Any particular reason why?
None that we're aware of, no. We know that Pali initiated coverage on all of these chains, but that's about all we do know. News reports on the move give no additional context to the rationale.

Now, few situations are more frustrating to investors in these stocks. We know what Pali thinks of their stocks, but we don't know why. Fortunately, we do know a little bit about Pali and its record. So by way of getting a feel for whether we should be listening to its advice today, let's review what we know.

Let's go to the tape
Pali may not be a household name, but at CAPS, we've run across its trail a time or two. Check out a brief bio of the New York stock shop. Or for an even briefer synopsis, let me just summarize its numbers: Pali sports an accuracy rating of just above 55% and ranks in the top half of investors -- but just barely.

Pali initiated coverage on a lot of retail clothing stocks this morning, but that doesn't mean it was entirely unfamiliar with the sector before today. Fact is, we've recorded ratings it has made in the past of retailers -- including some clothiers. A sampling of how it's fared:

Hmm. Pali didn't do half bad calling the bounce on Blockbuster, but I'm less than impressed with its track record on retail clothiers to date. Similarly, I must disagree with Pali's opinion on the two Fool faves it highlighted -- the only two of today's picks to receive firm up-or-down calls, I might add.

Take Zumiez, for example, which sells for a price-to-earnings ratio of just 17. Although the price-to-free cash flow ratio is significantly higher, most investors would call that an attractive valuation relative to consensus estimates of 22% long-term earnings growth. Yet Pali wanders way out on a limb to rate this one a "sell." In contrast, PacSun has no P/E -- because it has no profits. (It also has negligible free cash flow.) Still, that's the one that Pali says you should buy.

Foolish takeaway
On their face, Pali's ratings make little sense. Perhaps if we knew more about why the analyst thinks the way it does, or if it at least had a respectable record in retail, we could feel a bit more confident in following its advice.

But we don't, it doesn't, and I don't.