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'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 ...
Tuesday morning opened with glad tidings for shareholders of MasterCard (NYSE: MA). Not one, but two investment bankers upgraded the plastic-meister to buy-equivalent ratings:

• Avondale Partners, which calls MasterCard a "market outperform."
• Fox Pitt, which upgraded MC to just plain "outperform."

We don't know what got Avondale feeling so optimistic yesterday. Fox Pitt, however, told us that it sees a "potential catalyst" of some sort in the third quarter and likes MasterCard's valuation in the meantime.

If such "detail" leaves investors feeling unconvinced -- and judging from yesterday's sell-off in the shares, it does -- then I understand entirely. It's not a lot to go on, so let's see whether we can dig up a few more details, starting with ...

The analysts' records
The CAPS verdict on Fox Pitt is still up in the air. We've tracked this analyst for nine months now -- from its ill-fated first pick of Nanosphere (Nasdaq: NSPH) through its equally ill-fated August pan of Capital One (NYSE: COF) -- but to date, we have only eight recommendations on record for Fox Pitt. That's enough to generate an accuracy rating and a CAPS score, but perhaps not enough to draw long-term conclusions about this investment banker.

So far, though, things don't look promising. Fox Pitt guesses right only about 50% of the time and boasts a respectable, but not enviable, CAPS rating within the 60th percentile of investors, as of this writing.

Avondale Partners, in contrast, fares much better. Since getting off to a slow start last year, Avondale has quickly redeemed itself. It ranks in the top 5% of CAPS members and scores 56% for accuracy. Not bad at all. Its record includes:

Company	Avondale Said:	CAPS Says (out of 5):	Avondale's Pick Beating (Lagging) S&P by:
Walter Industries  (NYSE: WLT)	Outperform	***	176 points
Harmonic  (Nasdaq: HLIT)	Outperform	****	18 points
Winnebago	Outperform	*	(51 points)
AirTran Holdings  (NYSE: AAI)	Outperform	**	(56 points)

So here are two analysts -- one not great (yet), and the other formerly not so hot but now a real contender for greatness -- both singing MasterCard's praises. Are they right to do so?

Foolish takeaway
I fear not. We don't know what Avondale based its buy thesis on, but we do know that still-middling stock picker Fox Pitt cited MasterCard's valuation as a primary factor in upgrading the stock.

That said, while MasterCard is undeniably cheaper than it was back in late May (because the stock is, after all, down 31% from those heady days), it's not yet cheap enough. Leave aside the 89 price-to-earnings ratio. Even valued based on its free cash flow, MasterCard sells for a price-to-free cash flow ratio of 34.5. Based on consensus estimates of 22% long-term growth ahead, that's too expensive by half.

Moreover, the growth estimates for the likes of MasterCard and Visa (NYSE: V) these days are largely based on the companies' past performance -- performance that's probably been falling as consumer spending has slowed down. How long will this slowdown last? And will we spend as much in the future without the ability to use our homes as ATMs? I don't see the long-term slowdown in spending abating any time soon. Put it all together, and the bear thesis on this one goes like this:

• MasterCard is so expensive that only superior growth rates can justify its price.
• Those growth rates may not be forthcoming.
• Therefore, MasterCard is too expensive to own.