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...
"Best" may be a bit strong of a word for our featured analyst today. I don't mean to knock Pali Research -- these guys get more of their picks right than wrong, and that's more than a lot of analysts can say. And I suppose it also means the chances are good that yesterday's foray into the grocery sector will work out well for Pali, which now rates:

• Great Atlantic & Pacific Tea and Kroger (NYSE: KR) "neutral" ...
• ... While slapping "sell" signs on Safeway (NYSE: SWY), SUPERVALU, and Whole Foods (Nasdaq: WFMI).

Why so pessimistic, Pali?
Let's start at the top of the price heap, with Whole Foods. Pali predicts weak same-store sales at Whole Foods over the remainder of this year, and throughout next year. Why? Because "cost effective substitutes to Whole Foods ... will lead to material gross margin erosion over time." Pali expects that "a more cost conscious consumer, increased competitive activity and high-end price positioning" will reduce Whole Foods' comps growth to essentially nothing by next year.

And who is providing the "increased competitive activity?" You guessed it. The other firms named above, and a couple that aren't -- Wal-Mart Stores (NYSE: WMT) and Costco (Nasdaq: COST) -- are both now tromping around Whole Foods' organic garden.

Curiouser and curiouser
But here's something curious. If Everybody-But-Whole-Foods (EBWF) is cramping Whole Foods' growth and stealing its customers, shouldn't this translate into more growth for EBWF?

Not according to Pali. Arguing that consumers are now busy "chasing value," Pali sees a slowdown in comps gains at Safeway, and negative comps at SUPERVALU. Meanwhile, Pali rates A&P "neutral" -- but that doesn't seem to mean what Pali thinks it means. According to the analyst: "We are uncomfortable owning [Great A&P Tea] until management can clearly illustrate its ability to navigate through a difficult environment and deliver synergies intact. In the interim, we recommend investors avoid the shares."

But what about Kroger? Pali calls this one: "best in class," "the winner in consumer value perception," and "best positioned to absorb the pressures stemming from a deteriorating macro-economic and changing consumer behavior." Regardless, Pali suggests you avoid this one as well because: "investors will disproportionately punish Kroger's stock for a slight sequential softening in identical store sales growth."

Pali's pallid logic?
Accuse me of being a stickler for common sense if you must, but I just don't see a whole lot of logic in Pali's ratings of the grocery retailers. I mean, everyone's saying that a recession will hurt the restaurant industry, right? (Chipotle Mexican Grill (NYSE: CMG) sure seems to think it will, although other chains, like Buffalo Wild Wings (Nasdaq: BWLD) don't seem to have gotten the memo.)

But if people aren't eating out, it stands to reason they're eating in. And that means shopping for groceries -- but where?

Judging from Pali's comments, it seems to be saying "nowhere." The analyst says sales will slow at Whole Foods -- and at EBWF, too. Unless Pali honestly believes that we're all going to be dining on past-sell-by-dated cans of Dinty Moore from the local dollar store next year, though, people have to shop somewhere.

Foolish takeaway
Maybe I'm a crazy optimist, but the way I see it, just because we're in a recession doesn't mean America will stop eating entirely. And assuming we do keep eating, and shopping for things to eat, I'd reverse Pali's picks 180 degrees.

From a valuation perspective, you see, each of the stocks that Pali rates a sell -- Whole Foods, Safeway, and SUPERVALU -- looks fairly priced at first glance. Each carries a PEG ratio of 1.0 or thereabouts. (And no, of course a simple PEG isn't dispositive. But it gives us at least an initial suggestion that the stocks' prices are in line with expectations.) In contrast, while Kroger may be best-of-breed, it carries a price tag to match -- a 15 P/E, versus a projected growth rate of just 9%. (In case you're curious, A&P has no P/E because it has no trailing profits.)

So if you ask me, no, you don't have to sell the grocery stocks on Pali's say-so. At least, not until the analyst starts making sense.