This Just In: Upgrades and Downgrades

• Email
• Share
• Print

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.

Is Piper playing off key?
Piper Jaffray initiated coverage of credit card magnate MasterCard (NYSE: MA) this morning, advising investors to buy the stock.

Why? Basically, because it's not Visa (NYSE: V). According to the analyst, you see, there's a disconnect in the price investors are willing to pay for MasterCard as compared to its chief rival. Citing the former's "long-term earnings power potential" and the potential for valuations on MasterCard and Visa to converge over time, Piper believes now is the time to buy MasterCard.

The question is: Should you listen to Piper?

Let's go to the tape
At first glance, I'd have to answer no. Judging from its record on CAPS, Piper may not be the "worst" analyst on Wall Street, but it's hardly the "best." Fact is, Piper's 47% record for accuracy suggests that more than half the time Piper tells you to buy a stock, you'd be better off doing the opposite.

Now, granted, there are times and places when Piper is right, and some of those times, in some of those places, Piper really knocks the cover off the ball. For example:

Stock	Piper Says:	CAPS Says:	Piper's Picks Beating S&P by:
First Solar (Nasdaq: FSLR)	Outperform	**	587 points
priceline.com (NYSE: PCLN)	Outperform	*	198 points

Problem is, banking doesn't appear to be one of those places:

Stock	Piper Says:	CAPS Says:	Piper's Picks Lagging S&P by:
Colonial Bancgroup  (NYSE: CNB)	Outperform	*	62 points
Zions Bancorp (Nasdaq: ZION)	Outperform	*	47 points
American Express (NYSE: AXP)	Outperform	***	23 points

And I very much fear that we'll see something similar happen to Piper's latest pick. You see, Piper's recommendation of MasterCard hinges on just a couple of key points:

• "MasterCard's valuation is essentially in-line with the overall market multiple for the S&P 500 despite having a well above average long-term earnings growth profile and manageable risks to earnings, in our view."
• "MasterCard's valuation discount vs. Visa... is near its widest ever... suggesting to us that the valuation discount is unlikely to widen much further and could narrow as MA continues to exceed expectations and its revenue growth accelerates."

Now, I actually agree with Piper in part on this pick. MasterCard is a superior business. All other things being equal, it probably deserves a higher multiple to earnings than does the broader S&P. But to my mind, that just proves that the S&P 500 is more overvalued than is MasterCard -- not that the credit card company is undervalued.

Similarly with Visa. Yesterday, fellow Fool Morgan Housel made a compelling argument in favor of selling Visa based on the stock's sky-high valuation. Based on the firm's trailing 12 month results, you'll need about 50 years to get the price of one share of Visa today back as free cash, at the current level. Even if Visa manages to achieve the 20% long-term growth Wall Street posits for it, the stock looks way, way overpriced.

In contrast, relative to Visa's overvaluation, MasterCard's 42 times multiple to free cash flow looks cheap, but ...

... it's not
The fact that MasterCard isn't quite as overpriced as Visa isn't an argument for buying the former -- just one more argument for selling the latter. Forty-two times free cash flow on a 17% grower looks to me to be a recipe for disaster, folks.

And Piper's telling you anything different just proves it is tone deaf to the truth.