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.

Look out below!
Fertilizer investors, I hate to say "I told you so," but I did. Twice. Two weeks ago, in the process of discussing JPMorgan's downgrade of Deere (NYSE: DE), I predicted: "We could see lower spending at a whole host of ag-related enterprises. This trend won't stop at Deere. It will roll on to tumble PotashCorp (NYSE: POT) and Mosaic (NYSE: MOS), Caterpillar and Monsanto (NYSE: MON). ... Beware falling stock prices. There's more downgrades ahead."

One week later, the bad news began: Citigroup downgraded Potash and Mosaic. Fast forward to today, and the latest pair of downgrades came out this morning; this time it's All-Star analyst Soleil Securities hopping off the fertilizer wagon. Predicting a "slower-than-expected recovery in potash demand during FY10," and exclaiming over PotashCorp's just-announced guidance reduction (management previously told investors to expect $11 in earnings this year -- now we're looking at something closer to three bucks-and-change), Soleil pulled its buy rating on PotashCorp.

Incidentally, Soleil cited the same reasons for reducing estimates and pulling its buy rating on Mosaic as well. According to the analyst, this one's only going to earn $3.27 in fiscal 2010.

So what?
Are you feeling nervous yet? You should be. Soleil may be best-known as a prescient picker of tech stocks -- its bullish calls on IBM (NYSE: IBM) and Apple in 2006 have netted the analyst more than 200 percentage points worth of market outperformance combined.

But this latest Potash-basher is no nitrogen neophyte, either. To the contrary, Soleil weighs in as one of the best Chemicals analysts in the game. According to our records, Soleil has gotten 83% of its recommendations in this sector right over the last three years, stumbling just once:

Stock	Soleil Says:	CAPS says:	Soleil's Picks Beating S&P By:
Intrepid Potash (NYSE: IPI)	Underperform	***	41 points (two picks)
DuPont  (NYSE: DD)	Outperform	****	29 points (two picks)
Rockwood Holdings	Outperform	****	9 points
Monsanto	Outperform	****	(18 points)

Simply put, when Soleil says things are looking grim for fertilizer, PotashCorp and Mosaic shareholders have good reason to worry. And even that is not the worst of it. Soleil's new estimate for Mosaic's earnings falls short of the current Street consensus ($3.56 per share.) What does this mean for investors?

Look out below ... below
Well, let's see. PotashCorp and Mosaic have endured negative analyst reports three times in three weeks. Each successive update depresses estimates a bit further, and the latest report just came in below the average opinion.

Yet there are still 11 analysts out there recommending that investors buy Mosaic, and another 17 pundits pushing Potash. To me, this leaves a lot of potential for a whole slew of additional downgrades, each of which could nibble away a bit more market cap at both companies.

Aside from that, Mrs. Lincoln, how was the play?
Now, before you go wandering about the room in search of sharp objects, allow me to put this impending disaster in perspective. Investing in commodities is now, and always has been, a tricky business. There's no telling when a cycle will begin or end, or how long it will take in traveling from peak to trough.

What we do know is that these kinds of cycles tend to fix themselves. The same analysts who wax overoptimistic on the way up, later see nothing but doom and gloom at the nadir. They'll keep pushing the stocks down till the inevitable turnaround -- and this is good news for you and me.

Foolish takeaway
So here's the good news, Fools. The more downgrades that come out on PotashCorp and Mosaic, the more the stocks will fall. The more the stocks fall, the more attractive their prices will become. And at some point, these stocks will become cheap enough to own again. Be patient.