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.

You get a new upgrade ... everybody gets a new upgrade!
It was an honest-to-goodness Oprah moment. As airline investors debarked the trading floors Friday, investment banking superstar UBS offered each a parting gift: upgrades all around. US Airways (NYSE: LCC)? Upgraded. Continental (NYSE: CAL)? Upgraded. AMR Corp (NYSE: AMR) UAL Corp (Nasdaq: UAUA), and Alaska Air (NYSE: ALK) -- all upgraded!

What had UBS feeling so generous? According to the analyst, pared-down payrolls and strangled seat capacity on the costs side of the plane, when combined with a nascent economic recovery lifting revenues, could do wonderful things for airline profit.

In tone, therefore, UBS is adopting a much more optimistic take on the airline industry than JPMorgan did when issuing its own upgrades earlier this month. Click through the link above to get the Fool skinny, but the upshot of JPMorgan's upgrade was this: At least a couple of these companies have a chance of not going totally bankrupt. JPMorgan's exact words in describing their balance sheets were "adequate (not to be confused with good)."

So that's good news, right?
Not necessarily. While I've got nothing against Wall Street's glass-half-full thinking per se, I do expect the analysts expressing the optimism to show a record of guessing right on their picks. Sadly, that's not the case with UBS (or with JPMorgan either, for that matter.) Over the past three years, UBS has suggested investors take affirmative (buy/sell) action on airline stocks 20 separate times. Care to guess how many times this advice has beaten the market?

I won't keep you in suspense: The answer is less than half the time. Out of 20 airline recommendations made prior to its Friday-Five, UBS had beaten the market only 9 times.

UBS doesn't know how to fly ... and it shows
Now, I don't mean to sound harsh. The fact is, UBS is a fine analyst ... when it sticks to what it's good at. Metals and mining stocks, for example. UBS performs well above average in that sector, and has picked some real winners for its clients over the years. Its 2007 recommendation of Freeport-McMoRan (NYSE: FCX) has outperformed the market by over 60 percentage points. UBS's more recent recommendation of Teck Resources (NYSE: TCK) did even better -- more than quadrupling (and no, that's not a misprint) since UBS picked it in March of this year.

Similar big winners in sectors other than airlines have helped lift UBS into the top 15% of investors tracked by CAPS. But seeing as UBS is recommending airline stocks this time around, I submit that it's the italicized portion of the sentence above that you should be focusing on.

To my mind, UBS's key difficulty here is the lack of logic with which it analyzes the industry. Like JPMorgan, UBS seems to view the airlines as having more of a liquidity problem than a badly run-business problem. Presumably, UBS has held off on upgrading UAL till now due to worries over its balance sheet -- $2.6 billion in cash and $7.8 billion of debt. But noticing that UAL is "very likely to issue equity soon," UBS now says it would "be a buyer."

So seeing a money train rounding the bend, the analyst names UAL its "top pick" in the industry.

Foolish takeaway
Really? UAL posted $5 billion in losses over the last five full fiscal years, losing $2.4 billion over the last 12 months alone -- yet it lines up one more round of refinancing from gullible investors, and that's enough to turn the stock into a "top pick?"

Sorry UBS, but I just don't buy it. To the contrary, and perhaps it's impolite to pose the question, but I'm going to ask anyway: At what point, precisely, can we expect UAL and the other airlines to stop absorbing and destroying shareholder capital, and actually begin producing consistent profit? Wake me up when they figure out that trick. Because until then, I'm not interested.

I've said it before. I'll say it again: Beware of Steel and Airlines.