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.

And speaking of the best ...
Like the teens experiencing their first high-school crush, there's nothing so cute as bankers in love -- and lately, it's looking like Goldman Sachs (NYSE: GS) is the most popular girl at the dance. Last month, Banc of America Securities took Goldman for a whirl. Yesterday, it was Pali Research showing up on Goldman's doorstep, bearing a bouquet of flowers ... and an upgrade to "buy."

How does Pali love Goldman Sachs? Let me count the ways:

• Pali sees mergers and acquisitions activity rising, with "industry M&A backlog ... up 6% since the end of 2008 and the IPO backlog ... up 13% from the end of Q2'09."
• Even better, "GS's backlogs are up 20% and 32%, respectively" -- so Goldman's gaining market share in a growing market. Nice.
• The trading business also looks to be on the upswing. With hedge-fund redemptions on the wane, Pali expects Goldman to rake in commissions once the hedgies get back to buying.
• Last but not least, with so many of Goldman's rivals having bit the dust, "a lack of competition [will] continue to make FICC a solid story." ("FICC" referring, of course, to Goldman's business trading in fixed income securities, currency and commodities.)

Put it all together and Pali thinks Goldman can earn $18.06 per share this year, and $18.47 in 2010 -- numbers higher than B of A was banking on a month ago, and way ahead of consensus estimates (which call for $15.75 per share). Based on its best guess, Pali recommends you buy the stock and ride it up to $210 a share. But is Pali right?

Let's go to the tape
I have to tell you, Fools, that while I marvel at Goldman's record of success, I'm getting nervous about the flood of recommendations chasing this stock. These bankers are getting just a little too hot and bothered over Goldman -- and they're starting to lose their heads.

Take Pali, for instance. Oh, according to CAPS, it's a good enough analyst when sticking to industries it knows well, like media ...

	Pali Says:	CAPS Says:	Pali's Picks Beating (Lagging) S&P By:
Dreamworks Animation (NYSE: DWA)	Outperform	****	26 points (two picks)
Time Warner (NYSE: TWX)	Outperform	**	10 points (three picks)
Disney (NYSE: DIS)	Underperform	****	5 points (three picks)
DirecTV (NYSE: DTV)	Underperform	***	0 points

... but whereas 61% of Pali's media picks go on to outperform the market, fully 66% of its recommendations in the banking sector underperform the S&P 500. For example:

	Pali Says:	CAPS Says:	Pali's Picks Lagging S&P By:
Morgan Stanley (NYSE: MS)	Underperform	**	4 points
Jefferies Group (NYSE: JEF)	Underperform	**	21 points

And this is the record Pali produces? Hmm.

And yet ...
While I'm somewhat less than impressed with Pali's performance in the banking sector, I have to admit -- these guys have a point. Consider:

• If Pali's right about what Goldman will earn this year, then the stock's trading for less than nine times earnings.
• Take Banc of America's slightly less enthusiastic numbers as your starting point, and Goldman still sells for less than 10 times earnings.
• Or dial back your optimism all the way to the consensus estimate -- if Goldman earns less than $16 a share this year, then today's stock price has it still selling for just 10.2 times its profit.

Whichever number you use, though, today's price sure looks attractive relative to consensus predictions of 12.4% annualized five-year growth for Goldman. Heck, it even looks fair relative to the 11% growth that everyone was calling for just one month ago.

Foolish takeaway
Take Pali's promise of $210 a share with a couple of grains of salt. The analyst's poor record of performance in this space practically demands that you add seasoning. But even if Goldman's shares don't achieve the predicted 31% rise in price, the fact remains: They are cheap.