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'll be tracking the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

And speaking of the best ...
As pre-holiday trading wound down Thursday, Citigroup did its best to light a fire under the stocks of coal producers Arch Coal (NYSE: ACI) and Peabody Energy (NYSE: BTU), issuing twin upgrades to "buy." (Arch lit up for a 2.4% gain; Peabody misfired, ending down for the day.)

According to Citi: "The confluence of mine disruptions, strength across the energy complex, and robust BRIC-country demand has driven coal prices to 10-year highs." Dismissing recent stock price weakness at both Arch and Peabody, the banker insists this is "the end of the beginning, not the beginning of the end." But will these upgrades end well for Citi?

Let's go to the tape
Although Citi places near the elite ranks of CAPS All-Stars, it does so in spite of, rather than because of, its record for accuracy. At last report, the banker was getting a bare 51% of its picks right.

Granted, some of these picks have been in the energy sector, where coal dwells. Others, in the steel industry -- a key consumer of coal -- suggest Citi should have some expertise in this realm:

Company	Citigroup Said:	CAPS Says (5 max):	Citigroup's Pick Beating S&P by:
U.S. Steel (NYSE: X)	Outperform	***	84 points
Gerdau (NYSE: GGB)	Outperform	*****	61 points
Petroleo Brasileiro  (NYSE: PBR)	Outperform	*****	35 points

And yet, Citi's done particularly bad with several of its other energy-derivative plays:

Company	Citigroup Said:	CAPS Says (5 max):	Citigroup's Pick Lagging S&P by:
Tesoro (NYSE: TSO)	Outperform	****	46 points
Valero (NYSE: VLO)	Outperform	****	27 points
Sunoco	Outperform	***	27 points

The other black gold
So refining isn't Citi's bag. That much is clear. But what about coal stocks in particular?

Aside from Arch and Peabody, the banker's only other active coal pick is Massey Energy. Unfortunately, Citi's recommendation to sell Massey is also its worst-performing pick on record -- underperforming the market by an astounding 224 points. Suffice it to say that investors have reason to fear following Citi down the mine shaft again.

The more so because Citi's logic here may not hold up. As I explained last month, one reason to own Peabody (or Arch) despite their sky-high P/E ratios hinges on the high cost of Powder River Basin coal. But that price has been falling of late. From a high north of $14 in late May, spot prices on Powder River Basin coal have fallen steadily, and now sit below $13.

Now sure, Peabody's market cap values its reserves at just $2.26 per ton of Powder River Basin coal, and Arch is only a little more expensive at $3.17 a ton. Both stocks thus carry sizable discounts to the amount of coal they control -- but the gap is narrowing, and fast. If Citi's right about this being just the "end of the beginning," and Powder River Basin coal prices perk back up, Thursday's upgrades should work out well. But if not ...

Well, long story short, keep an eye on those spot prices.