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 track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

And speaking of the best ...
Ahoy, shipping investors! Good news from the crow's nest: Dahlman Rose says the storm's starting to break out east, and the sailing is looking smoother for a whole raft of dry bulk shippers.

Pointing to "positive industry dynamics" in the global steel industry, Dahlman upped its ratings to "buy" on: Star Bulk Carriers, Safe Bulkers, and Eagle Bulk Shipping (Nasdaq: EGLE), as well as Genco Shipping & Trading, Paragon Shipping, and Diana Shipping (NYSE: DSX). Excel Maritime Carriers (NYSE: EXM) got an upgrade as well, but only to hold.

(Sorry, DryShips (Nasdaq: DRYS) investors. No upgrade for you.)

Hold up a sec. Who's Dahlman Rose?
Hmm. Fair question. In contrast to higher profile pickers like Citigroup, Dahlman Rose is not exactly a household name, but it is a pretty focused player in the natural resources industry, tracking the pricing and prospects of everything from maritime shippers to miners to offshore drillers.

As it turns out, they're also pretty good at what they do. We began tracking the company's progress in CAPS back in January '08. So far it's getting about 52% of its picks right. (Which may not sound like much, but is actually above average.) A few examples drawn from the customers that these shippers serve: 

Stock	Dahlman Says:	CAPS Says (Out of 5):	Dahlman's Pick Beating (Lagging) S&P By:
Freeport-McMoran (NYSE: FCX)	Outperform	****	69 points
Peabody Energy (NYSE: BTU)	Outperform	****	9 points
Century Aluminum (Nasdaq: CENX)	Outperform	****	(59 points)

OK, so Dahlman knows its stuff. And it says steel is on the upswing, and so the dry bulk carriers that haul the stuff -- and also the coal, iron ore pellets, and so on that are used to smelt the stuff -- should be riding high as well.

Logical? Sure. But should you invest in this? I'm not so sure.

I mean, yeah, with most of these stocks trading at single digit P/Es (Genco trades for 12, and money-losing Excel has no P/E, but Star Bulk, for example, is trading for less than twice profits), these shippers look priced to sail.

That said, there's a reason these prices look so low. This reason being that, in the near term at least, their prospects look bleak. Wall Street expects every man jack in this fleet to post a decline in earnings next year. And while it's true that analysts expect several of the companies -- Genco, Safe Bulkers, and Excel -- to turn things around and turn a better profit in years to come, I can't help noticing that:

• The company with the best prospects for a turnaround (in Wall Street's view) is the one that Dahlman likes least -- Excel Maritime,
• And that only one of the seven stocks named has anything approaching an attractive P/E-to-growth ratio -- Safe Bulkers, with a 3.4 P/E and 5% projected long-term growth.

Foolish takeaway
When you combine opaque growth prospects with this industry's history of overbuilding (and overspending on capital expenditures), the inherent volatility of investing in commodities-driven stocks, and the occasional CEO with shareholder-unfriendly actions, the shipping sector seems rife with reefs for the unwary investor.

My advice: No offense to Dahlman, but I'd leery of sailing in search of value on stormy seas. There's simply no need to risk it -- not when there are so many more obvious bargains right here at home.