This Just In: Upgrades and Downgrades

Motley Fool Stock Advisor

Since 2002, David and Tom Gardner have returned 29.67% while the S&P 500 returned -10.96%. Try Stock Advisor free for 30 days.

• Try it Free

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 ...
Historically, investors facing a recession have sought safe havens in "noncyclical" industries. No matter how bad things get, consumers will still buy their razor blades from Procter & Gamble (NYSE: PG). No matter how depressing the Great Depression Redux becomes, everyone can afford to have one of Coca-Cola's (NYSE: KO) drinks and a smile. And, oh yes -- you've got to keep the phone turned on. (Helps with the job search, now that you're out of work.) So you can count on AT&T (NYSE: T) and Verizon (NYSE: VZ) weathering the storm.

Or can you?

According to one of Wall Street's Best stock pickers, you cannot. Bernstein Research started off the New Year's first full week of stock trading with a pair of downgrades this morning, knocking AT&T down to "market perform" and kicking Verizon down one notch further, to "underperform."

Time to hang up on telcos
The analyst conceded: "AT&T and Verizon may indeed be somewhat more recession-resistant than most business." However, "we believe they are nevertheless much more cyclically exposed than consensus estimates (and valuations) would suggest."

Specifically, Bernstein worries that wireless services are now "approaching saturation" in the U.S. Struggling U.S. businesses will cause "negative enterprise growth." Even that most recession-resistant of services, the venerable home landline, could be at risk, as hard-pressed consumers cut costs wherever they can. Put it all together, and Bernstein felt compelled to slice 14% off of its 2009 earnings estimate for AT&T, and 12% off Verizon -- and downgrade 'em both.

Let's go to the tape
Counterintuitive as the new recommendations may sound, you have to give Bernstein credit. This banker may not rate a lot of stocks, but those on which it does opine, it tends to get right. Bernstein has racked up a record of 54% accuracy on its picks, with the average recommendation beating the market by nearly four percentage points. In the telecom sector, in particular, these folks really know their stuff.

Company	Bernstein Said:	CAPS Says:	Bernstein's Pick Beating S&P by:
Nortel (NYSE: NT)	Underperform	**	64 points
Vodafone (NYSE: VOD)	Outperform	****	27 points
Nokia (NYSE: NOK)	Underperform	****	6 points

I have to say, too, that Bernstein's predictions jibe pretty well with my own anecdotal observations of consumers increasing their comparison-shopping for the "best" (read "cheapest") telecom service bundles. Friends of mine have "cut the cord" on their landlines to go totally cellular. And my own family recently discussed not whether to downgrade our cable package, but how much of a cut to make. That all lends support to Bernstein's view that Big Telco is not nearly as recession-proof as it may once have been.

Foolish takeaway
Granted, Big Telco bulls can point to the companies' beefy 5%-plus dividends as reason to invest in either AT&T or Verizon, or both. Bears, in contrast, may wonder just how safe those dividends will remain in an era of shrinking telecom revenue. Foolish minds can certainly differ on the subject of just how bad things will get.

But when you add up the twin downgrades by a respected analyst, changing market trends that reduce the counter-cyclical nature of the telecom business, and anecdotal observations in support of Bernstein's thesis, I think the result is ... a pretty strong bear thesis against both AT&T and Verizon.

On Jan. 12, 2009, Fool co-founder David Gardner, Jeff Fischer, and their Motley Fool Pro team will accept new subscribers to their real-money portfolio service. Motley Fool Pro is investing $1 million of the Fool’s own money in long and short positions in a range of securities, including common stocks, put and call options, and exchange-traded funds (ETFs). They also incorporate proprietary CAPS "community intelligence" data into their research. To learn more about Motley Fool Pro, and to receive a private invitation to join, simply enter your email address in the box below.