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.

And speaking of the best ...
Like teens experiencing their first high-school crush, there's nothing as cute as bankers in love -- the latest instance of which was published in the "Commitments" section of yesterday's edition of Briefing.com. There we learn that the dashing European prince of investment banking, Deutsche Securities, has proposed to American girl-next-door Citigroup (NYSE: C), initiating coverage at "buy."

Why should we care? Why did ABC revive The Bachelorette? I guess Americans just love a good love story. And as I explained back in August, Deutsche has proven itself adept at separating the gentlemen from the cads in the world of Commercial Banking:

Stock	Deutsche Says:	CAPS says:	Deutsche's Picks Beating S&P By:
Fifth Third Bancorp (Nasdaq: FITB)	Underperform	**	45 points
Regions Financial (NYSE: RF)	Outperform	**	24 points
US Bancorp (NYSE: USB)	Underperform	****	2 points

Sadly, it's been less successful finding eligible bankers in the Capital Markets:

Stock	Deutsche Says:	CAPS says:	Deutsche's Picks Lagging S&P By:
Morgan Stanley (NYSE: MS)	Outperform	**	19 points
Fortress Investment (NYSE: FIG)	Outperform	**	45 points
E*Trade Financial (Nasdaq: ETFC)	Outperform	****	53 points

What's got Deutsche all hot and bothered about Citigroup? Deutsche jots down a few love notes in its research report:

• Citi looks "well-positioned vs. most other banks" to either capitalize on an economic recovery, or survive a double-dip recession.
• Its valuation looks similarly attractive at 1.1 times "trough tangible book value" versus 1.5 times for most U.S. banks.
• The U.S. government's 34% stake in the bank could soon be reduced, giving Citi more freedom to seek profit where it finds it.

Lastly and most importantly, Deutsche peers into its crystal ball and makes a few prognostications about Citi's future. Specifically, Deutsche sees Citi earning "normalized" earnings of $0.65 per share before deploying its excess capital. Over time, Deutsche thinks Citi can grow its annual earnings into the $0.95-per-share range, and command a valuation of $10 per share.

Dating game or guessing game?
Now, if Deutsche's right, that works out to more than a double for investors who follow its advice, and buy Citi today. But what if Deutsche is wrong?

What worries me most about Deutsche's prognosis is its heavy reliance on Citi's valuation relative to the worth of its assets. I, for one, have no idea how reliable Citi's book value might be, or what further writedowns in asset value might lie ahead. Do you?

And what worries me more than most, I guess, is the banker's assumption that Citi will achieve $0.65 in "normalized" earnings and $0.95 "in a few years." First of all, in a world of multi-billion-dollar quarterly writedowns, what's "normal" even mean anymore? Second -- where does Deutsche come off predicting these large increases in earnings for Citi, when the rest of Wall Street is predicting that Citi's earnings will actually decline 1.5% per year for the next five years?

Foolish takeaway
Now don't get me wrong. I'm not saying Citigroup won't turn out to be the next home-run stock in banking. It very well might. But Deutsche's asking us to take an awful lot on faith in accepting its bullish stance on Citi -- and I don't know about you, but my faith in the banking sector is just about used up.

In banking, and in Citigroup stock even more than elsewhere, you pays your money and you takes your chances. But me, I'm staying out of the casino.