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.

Bankers in love
On Wall Street, the bankers are in love once again.

Yesterday, JPMorgan Chase gave a buy rating to its newest squeeze, American Express (NYSE: AXP  ) . Arguing that "deleveraging" is all the rage among consumers these days, JP said it thinks AmEx is best positioned to grow its pay-it-off-every-month credit card business in America these days. Plastic purveyors Capital One (NYSE: COF  ) and Discover Financial got no such love; JP initiated both at "neutral."

I'm a romantic at heart, so it pains me to say that the JP-AmEx relationship has about as much chance of success as Sandra Bullock had with Jesse James.

A match made in hell
For starters, JPMorgan has absolutely no taste when it comes to picking paramours in the financial services industry. Here's a quick review of how several of its previous dalliances turned out (up until JP stopped reporting its ratings through Briefing.com):

Companies

JP Said

CAPS Says

JP's Picks Lagged S&P by

Morgan Stanley (NYSE: MS  ) Outperform ***** 8 points
UBS Outperform **** 17 points (picked thrice)
Zions Bancorp (Nasdaq: ZION  ) Outperform **** 46 points
Citigroup (NYSE: C  ) Outperform *** 73 points

How much do you want to bet that this week's AmEx pick will work out any better?

Over/under
Personally, I'm not optimistic, and JPMorgan's record in the financial sphere is just part of the reason. Valuation offers another clue; at 14.4 earnings, and paying a 1.7% dividend, AmEx looks only fairly priced relative to the 11% growth rate most analysts posit for it. It might even be a bit overpriced.

In contrast, I see MasterCard (NYSE: MA  ) selling for 18.6 times earnings, and Visa (NYSE: V  ) costing just 18.1. Both are expected to outgrow AmEx's plodding pace, posting roughly 20% long-term earnings growth. For that matter, even Capital One looks like a better bargain than AmEx. It's slower-growing (8%, projected), but a heckuvalot cheaper at a P/E of just 7.1.

Over ...
Fools know that I base probably 99% of my investing decisions on valuation. On that basis alone, I think AmEx will have a hard time beating the S&P's returns from today's price. But in this particular case, I also dislike JPMorgan's suggestion that AmEx will outperform other major credit card firms because of its pay-as-you-go premise. That just doesn't hold water for me.

Sure, some AmEx cards require you to pay off your balance every month. And sure, some consumers might decide to take tighter rein on their spending, stop rolling over so much credit card debt, and try to start paying it off regularly, before interest charges accrue. But anyone can do this with any card. No one's stopping you from paying your bills in full when they come due. Singling out AmEx on this basis just seems silly.

And out
Furthermore, AmEx isn't user-friendly. Maybe 20 years ago, it might have been "cool" to have an AmEx card. The brand had cachet and exclusivity. But today, using an AmEx card is just a nuisance.

If I had a nickel for every time I've walked into a store, slapped down an AmEx card, and been curtly informed the store didn't take it, I'd have a lot of nickels. Maybe I'd even still have an AmEx card in my pocket. But I got tired of having the card rejected, or accepted with a glint of resentment in the merchant's eye as she picked up the card, knowing she'd automatically be hit with a higher interchange fee on this transaction.

Maybe JPMorgan doesn't see that posing a problem to AmEx's growth, but I do. That's why I always leave home without the card -- and why I won't be following JP's advice to buy the stock today.

American Express is a Motley Fool Inside Value recommendation, but Rich Smith does not own shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 605 out of more than 170,000 members. The Motley Fool has a disclosure policy.

Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.


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