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

And speaking of the best ...
Nine months ago, Home Depot (NYSE: HD  ) CEO Frank Blake predicted the end of the recession with the fateful words: "We don't think we're at the bottom yet, but we think you can see it from here." Yesterday, Wall Street banker R.W. Baird followed in Blake's footsteps, and predicted the end of the recession for Home Depot.

And for Lowe's (NYSE: LOW  ) . And since you ask, yes, for Wal-Mart Stores (NYSE: WMT  ) , Target (NYSE: TGT  ) , and Tractor Supply (Nasdaq: TSCO  ) , too. Each and every one of these retailers received the coveted "outperform" rating from Baird. (PetSmart, Costco (Nasdaq: COST  ) and BJ's Wholesale (NYSE: BJ  ) weren't so fortunate, however. Baird initiated coverage on these three at "neutral.")

Baird's reasons for optimism vary from company to company. For example, Baird highlighted Wal-Mart's "improved fundamentals" and predicted the discount shopping magnate will capitalize on the flow of recession-weary consumers seeking deals, diverting some of these new customers "to higher margin categories." Thus, Baird sees Wal-Mart as developing a "formula for continued success in today's (and tomorrow's) retail environment."

In contrast, Baird's endorsement of Target relies in large part on the fact that the chain is doing worse than Wal-Mart in this environment. Whereas Target's higher "discretionary sales mix and credit exposure were liabilities in the downturn," Baird sees them turning around to "provide leverage during an eventual recovery in spending trends later this year and into 2010."

Baird loves everybody, but does everybody love Baird?
If it sounds to you like Baird's trying to have things both ways -- arguing that stocks will go up no matter what, and that each specialty retailer is "special" in its own way -- well, I can't blame you. The arguments sound a little wishy-washy to me, too. Nor am I particularly enthusiastic about following Baird's advice today. Not after checking out the analyst's record on CAPS.

Coming up on three years of assiduous tracking of Baird's comings and goings, you see, have shown us that this analyst scores 50% for accuracy on its picks. Essentially, it's right as often as a coin flip -- no more, and no less.

But if that doesn't sound too good to you, hold on -- it gets worse. One of the really neat features of CAPS, recently introduced, is that with our "Sectors" tab we can now tell you not just "how bad is Baird?" generally, but how bad is the analyst at picking stocks in particular sectors. The results may surprise -- and frighten -- you.

So? How bad is it?
Turns out, given its record at picking stocks generally, it's even worse within the specialty retail sector in particular. Thirteen times over the past two-and-a-half years, Baird has published ratings on retailers that we've captured in CAPS, and every single time it's done so, it's told people to buy 'em. Thirteen buy recs and nary a sell tells us that Baird's never met a specialty retailer it didn't like. (That's true of Baird's picks in other retailer sectors, as well, such as Textiles, Apparel and Luxury Goods.) And how did that work out for Baird, you ask?

As of right now, only three times has Baird's recommendations in Specialty Retail outperformed the market to date -- which is just 38% accuracy by how we score things. Worse, two of those times include the Home Depot and Lowe's upgrades that Baird made yesterday, and as we know, such upgrades often turn into self-fulfilling prophecies as the stocks jump on the upgrade news. But, so far, not this time -- Baird trails the S&P 500 for those two picks.

Ouch
"Ouch" indeed. Investors who followed Baird's advice yesterday, who bought into these stocks on the analyst's say-so, could be in for a nasty surprise if the analyst's latest picks perform as they have in the past.

My fear: Frank Blake's prediction that the recession will soon end notwithstanding, Home Depot and Lowe's investors may find that for them, the bad news is just beginning.

Costco and PetSmart are Stock Advisor picks and the Fool owns shares of Costco. Plus, Costco, Home Depot, and Wal-Mart are Inside Value recommendations. To read why, take a free 30-day trial of either one.

Fool contributor Rich Smith does not own shares of, nor is he short, any company named above. You can find Rich on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 726 out of more than 135,000 members. The Motley Fool's disclosure policy performs well in any market.


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