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 ...
Reports that Blockbuster (NYSE:BBI) is contemplating filing for bankruptcy -- which the company vigorously disputes, by the way -- have the DVD rental industry turned upside-down this week. Yesterday, shares of the bricks-n-clicks movie renter plunged 77% before trading was halted after Bloomberg broke a story asserting that Blockbuster had hired law firm Kirkland & Ellis to work up a prepackaged bankruptcy for the firm. Blockbuster's vehement denial sent the shares flying right back up this morning, up 100% as of this writing.

Now Wall Street Wizard Stifel Nicolaus has entered the fray, upgrading the shares of Blockbuster rival Netflix (NASDAQ:NFLX) to "hold" this morning. According to Stifel, "the near-term storyline" here is the possibility that Blockbuster's "store base and revenue base" will shrink, helping to "redistribute a portion of Blockbuster's $2 billion in annual domestic movie rental revenue" right into Netflix's wallet.

Let's go to the tape
On its face, Stifel's argument makes sense. With Amazon.com (NASDAQ:AMZN) still sitting out this fight, and Wal-Mart (NYSE:WMT) long gone from the space, if Blockbuster goes bye-bye as well, Netflix should be last company standing in the DVD-by-mail game. By definition, Blockbuster's loss should become Netflix's gain.

What's more, Stifel has developed a sterling record of picking winners in online commerce:

While it's true that Stifel has only a 52% record for accuracy on its picks overall, its blunders tend to crop up in other sectors. (Airlines, for example; picks such as Boeing (NYSE:BA), AMR, and UAL are all underwater.) Even with these misses hobbling its record, Stifel's performance impresses. The analyst outperforms the market by about five points per pick on average, beating more than 92% of investors tracked by CAPS in the process.

Tell us what you really think
Speaking of past Stifel picks, I think it's worth revisiting Stifel's February downgrade of Netflix -- which, by the way, lost the analyst 19 points -- for a moment of context. Back then, Stifel called Netflix "a good company that treats its customer well. ... well-managed and ... positioned well for an eventual transition to digital."

At the time, I commented that these were pretty strange assessments for a stock downgrade. But Stifel loved Netflix even then -- it just thought the stock had gotten a little pricey relative to its prospects. Seems to me, Stifel has probably been itching to upgrade Netflix ever since. Yesterday's news was the perfect excuse.

Parsing the language of Blockbuster's non-denial denial -- "we do not intend to file for bankruptcy" -- I believe Blockbuster doesn't intend to file for Chapter 11 … if it can avoid it. But the company's financial straits are dire, with a large term loan and a revolving line of credit both coming due within the next six months. It's still quite possible that the choice not to file may be out of Blockbuster's hands. I fear it's dependent on the kindness of bankers.

Foolish takeaway
That said, there's still reason to be cautious. That's why I agree with Stifel today that Netflix is only a "hold," and not yet a buy.

You see, while I called Blockbuster the worst stock of 2009, there's restructuring, there's bankruptcy, and then there's bankruptcy. Seems to me, Blockbuster needs to do something about its onerous debt load, and quickly. Half of its operating income went to cover interest payments last year. Right now, the company is going for restructuring its debt load, but in the middle of a recession, that might prove difficult.

Which leaves the possibility of bankruptcy, either the reorganization kind -- resulting in a less-leveraged, stronger company, better able to compete with Netflix -- or the full-blown liquidation kind. Until we see which route the company ends up taking, Netflix shareholders shouldn't count their proverbial chickens just yet.