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 ...
Before the trading week could end last week, Swiss megabanker UBS had time to take one last swing with its ratings pickaxe -- and left its mark on twin fertilizer miners Mosaic (NYSE:MOS) and PotashCorp (NYSE:POT). The banker's downgrade (to "neutral" on both stocks) chipped nearly 2% off the top of Potash, and sliced 3% from Mosaic.

Three things concern UBS about these stocks:

1. The likelihood of weak demand for potash over the course of next year.
2. The effect this will have on corporate profits.
3. The belief that both stocks are priced for more profits than they're likely to produce. 

Long story short, UBS now predicts lower-than-consensus profits for Potash over the next two years, and significantly lower earnings for Mosaic. Consequently, UBS pulled its "buy" ratings on both stocks. But was it right to do so?

Let's go to the tape
Judging from its record on past picks in the Chemicals industry, chances are UBS is calling this right. While it's true that UBS has made its fair share of mistakes in the sector ...

... it's also called things right more than once:

In fact, UBS's record of 56% accuracy on picks in the chemical industry picks exceeds the banker's overall performance on CAPS (51% accuracy across all sectors.) What's more, when UBS makes a correct call, it's often very right in its predictions. For example, while UBS is no longer advising that you own Potash, it has twice recommended the stock over the past three years. Between those two picks, UBS racked up 121 percentage points worth of market outperformance.

Simply put, this is one banker that knows its fertilizer. (Unlike some others I could name.)

No gold in fertilizer
Now, I won't rehash my valuation arguments against these stocks today -- I laid those out two weeks ago, and won't bore you with the gory details. Suffice it to say that I share UBS's concerns over the pricing on these two stocks.

Instead, let me point out that in addition to UBS, and myself, we also recently learned that uber-investor Goldman Sachs (NYSE:GS) has some worries of its own. Responding to a report that potash inventories may have peaked earlier this month, Goldman pointed out that, yes, this gigantic pile of fertilizer has ceased growing -- but inventories today are still more than twice their average size over the last five years. (So don't go trying to make an oversupplied mountain look like a molehill of a supply shortage.)

Foolish takeaway
To my Foolish eye, the numbers just don't support the theory that a supply crunch is imminent. With potash supplies plentiful, I see little impetus to higher prices on the stuff, and little reason to doubt the low single-digit profits growth that most people on Wall Street are predicting.

Until these stocks' prices fall far enough for their limited growth prospects to support 'em, I feel there's just no compelling reason to own either Potash or Mosaic today.

Disagree? Feel free. If you think UBS and Goldman (and I) are making a grave mistake in not buying Potash and Mosaic today, here's your chance to set us straight. Post your bullish thesis on:

• PotashCorp here
• And Mosaic right here.

Motley Fool CAPS : It's fun, it's free, and it just might make you famous.