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
Winter's chill is in the air, but up on Wall Street, it's the sweet strains of springtime romance we hear -- and a tale, once again, of bankers in love.

Earlier this month, we regaled you with tales of an ill-fated romance, when JPMorgan Chase (NYSE: JPM) declared its love for and American Express (NYSE: AXP). It was a match doomed to divorce through irreconcilable differences -- JP's always looking hunting for bargains, while AmEx has very expensive tastes. But this week, we've a happier tale to tell, as FBR Capital plights its troth to Capital One Financial (NYSE: COF). This time, I think we've found a match made in heaven.

Why? Well consider: According to FBR, Capital One currently sells for a 25% discount to its historical average price of about 10.5 times forward earnings. What's more, Cap-One's cheap not just in its own right, but also in comparison to its plastic-purveying peers. Selling for less than 8 times earnings today, the stock costs roughly half the price of AmEx or Discover Financial. Or when weighed against bankers that, like Capital One, are heavily involved in the credit card game, Cap-One's P/E compares favorably to the 11.6 price-to-earnings ratio at JPMorgan, the 88x ratio at Citigroup (NYSE: C), and the unprofitable (and therefore P/E-less) Bank of America (NYSE: BAC).

Granted, with most folks on Wall Street predicting the best Capital One can hope to accomplish over the next five years is grow its earnings at an 8% rate, you can argue Cap-One is "cheap for a reason." But what you may not know, and what FBR points out, is that Capital One has been sitting on a substantial amount of loan-loss reserves. FBR believes these reserves will be gradually released going forward, boosting Cap-One's earnings and causing analysts to bump up their earnings estimates for the bank -- and their estimates of how fast profits will grow.

Let's go to the tape
Is FBR right about that? Well let's see here ... according to our data on FBR, assembled over four years of tracking the analyst's performance on CAPS, this banker is currently getting 54% of its Capital Markets bets correct. 67% of its recommended Commercial Banks are right on the money. Most crucially, 61% of the time FBR gauges the trajectory of a bank in the Thrifts and Mortgage Finance industry, it goes right where it's "supposed" to. On the other hand, FBR hasn't fared so well with the two marquee credit cards-issued-by-banks names. It's still underwater on its active recommendations of both MasterCard (NYSE: MA) and Visa (NYSE: V):

Still, FBR's overall record impresses -- especially its score on thrifts and mortgages. You see, according to FBR, one reason Capital One currently carries a P/E so much lower than its rivals is that, investors are "discounting for potential mortgage reps and warranties liability." (I.e., Investors fear that the people who bought mortgage instruments from Cap-One and got burned on their investment will demand the bank buy back the mortgages -- and take a loss.)

FBR calls these worries "excessive," and argues that "COF has sufficiently reserved for mortgage repurchases" and the losses they might cause the bank. And maybe they're right ... in which case not only could Capital One be selling at a discount; FBR would also most likely be right about the growth rate accelerating as well, if the reserves Cap-One has taken turn out to be greater than what it needs.

Foolish final thought
Before I close today's column, I want to point out one final factoid for your consideration. Reviewing FBR's analysis, I was struck by the fact that the other key metric FBR cites in defense of Capital One's valuation -- the stock's price of 1.6x tangible book value -- is higher than what investors are being asked to pay for JP, Citi, or B of A stock. Turns out, these similarly mortgage-exposed bankers are selling for multiples of 1.4, 1.1, and 1.0 times tangible book value.

Which raises an interesting question: If Capital One is selling for a 1.6x multiple, and FBR deems that "excessive" (a conclusion I agree with), then what does it mean when we discover that so many of its rivals sell for even lower multiples? Mightn't it be the case that all these bankers are cheap?

Tell us what you think, below.