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 ...
We generally use the term "the best" in a relative, grade-on-the-curve kind of way in this column, but today, we've got a pick from the bona fide best for your consideration.

With a CAPS rating of 97.34 and a record of nearly 57% accuracy on its recommendations, Banc of America Securities places 13th on the list of 170 Wall Street professionals we track, and fully deserves its coveted "Wall Street Best" icon on CAPS. Today, BoA gave us not just one pick to consider, but a full dozen, and here's the best news: If you're invested in a managed health-care company, chances are you're going to do well.

Breaking its dozen into two groups, BoA handed out "buy" ratings on the majority of the picks on which it initiated coverage:

  • Aetna (NYSE: AET  )
  • Centene
  • Humana (NYSE: HUM  )
  • Molina Health care
  • UnitedHealth Group (NYSE: UNH  )
  • WellCare (NYSE: WCG  )
  • WellPoint (NYSE: WLP  )

Everybody else got "holds":

  • AMERIGROUP (NYSE: AGP  )
  • Cigna
  • Coventry Health (NYSE: CVH  )
  • Health Net
  • Healthspring

Best of all, there wasn't a single "sell" rating in the bunch.

Any particular reason why?
So far, we cannot be certain what separates the one group from the other. No major news outlets have explained BofA's rationale, but crunching a few numbers, I do see a pattern.

What differentiates the groups are their growth rates. Every single one of the stocks that BoA rated a "hold" is expected to grow slower than the industry-average predicted growth rate of 13.95%. Most of the buy-rated stocks are expected to grow below average too, of course, but Aetna, Humana, and WellCare are expected to grow faster

Moreover, each of these three also carries a P/E below the industry average of 12.4. So faster-than-normal growth plus a cheaper-than-normal price tag -- that seems to explain at least half of BoA's buy ratings. As for the rest, we're just going to have to trust the analyst on this one. Considering the record BoA has built for itself, I think that's a safe bet.

WellPoint and UnitedHealth Group are Motley Fool Inside Value recommendations. UnitedHealth Group, Coventry Health Care, and AMERIGROUP are Motley Fool Stock Advisor recommendations.

Fool contributor Rich Smith owns shares of UnitedHealth. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 584 out of more than 115,000 players. The Fool has a disclosure policy.


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