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 …
Last week, we took a look at the twin downgrades that ace Wall Street stockpicker Stifel Nicolaus issued on Altria (NYSE: MO) and Lorillard (NYSE: LO). Despite praising both companies for grabbing market share with all the eagerness of a relapsed smoke fiend tearing into a fresh pack outside a 7-11, Stifel worried that much of the enthusiasm for these stocks has now been baked into their share prices.

With Altria trading for 14.5 times earnings, and Lorillard at 13.0, Stifel worried aloud over the rapidly shrinking "relative valuation gap" on the shares, and suggested that today's prices make it unlikely the shares can outperform the S&P 500 going forward.

I agreed, and this morning, Deutsche Securities nodded its assent as well. "Stable pricing, improving volume, manageable legal risk, attractive cash return" all argue in favor of Altria's continued success as a business, says Deutsche. As for the stock, however, the "valuation" is simply too rich. According to the analyst, with Altria selling "near the high end of historical cash flow multiples" after its run-up, it's now time to collect your winnings and shift this stock into the "holds" column. (And seeing as Reynolds American (NYSE: RAI) sells for an even pricier 17.4 times earnings today, Deutsche packs that one right in there alongside Altria.)

Good, better, best
As I explained last week, I think the case against all these smokes-stocks is crystal clear (with the exception of Altria-spinoff Philip Morris International (NYSE: PM), a true international powerhouse). Even with the added boost of generous dividend yields, the mid-single digit growth rates on Altria, Lorillard, and Reynolds aren't nearly good enough to justify the stocks' double-digit P/E ratios.

The argument only got stronger once we saw Stifel Nicolaus's record of literal 100% accuracy on its tobacco picks, alongside its superb accuracy recommending analogous global consumer brands like McDonald's (NYSE: MCD), Coca-Cola (NYSE: KO), and PepsiCo (NYSE: PEP). But if there were any doubters remaining, this week brought us the final coffin nail in the pro-Altria argument: Deutsche has a record fully as good as Stifel's. Over the years, Deutsche has recommended a quartet of tobacco stocks to its customers. Every single one of them has beaten, and is still beating, the S&P 500's returns:

Astounding. So here we have not one, but two analysts with unbroken records in the industry, downgrading stocks that are by any rational method of valuation at best fairly priced, and much more likely, a bit too expensive to own …

Fools -- Don't rush in
In as dicey a business as stockpicking, 100% accuracy is a record just begging to be broken. That said, when I see an analyst boasting perfect accuracy on a certain type of stock, I hesitate to bet against 'im. When I see two such analysts, both saying the same thing, and when that same thing aligns perfectly with what my own analysis tells me -- there's no chance at all that I'm going to take the opposite side of the trade.

Today's decision is a literal no-brainer: If you own Altria or any of its domestic peers, it's time to kick that habit.