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 worst and sorriest, too.

And speaking of the best ...
This just in on a fast boat from China: CAPS standout analyst Deutsche Securities has picked a side in the great debate between buying China Mobile (NYSE: CHL  ) or China Unicom (NYSE: CHU  ) , and the winner is ... China Mobile.

Before this morning, Deutsche had pegged both companies as "holds" while it made up its mind as to which one was better. Deutsche's decision was decisive, though: Buy China Mobile, and sell China Unicom. According to the analyst, China Unicom has outperformed its peers recently on "the premium it may receive in selling its CDMA network to China Telecom (NYSE: CHA  ) ." Mind you, Deutsche thinks the premium is real, and even raised its price target on the stock in anticipation of it -- yet Deutsche slapped a sell rating on China Unicom because after the network is sold, it expects the company to lose ground to China Mobile.

Speaking of China Mobile, Deutsche predicts that we'll see this provider dominate the market through improved delivery of value-added services. (In other words, instead of growing revenue by simply growing its market share or subscriber base, China Mobile will try to extract more and more yuan from existing customers by selling them more cellular bells and whistles.)

Let's go to the tape
OK, now that we know the underpinnings of Deutsche's buy/sell decision, let's look at how a few of its past phone picks have panned out.


Deutsche Said:

CAPS Says(out of 5):

Deutsche's Pick Beating S&P by:

VimpelCom (NYSE: VIP  )



74 points

AT&T (NYSE: T  )



27 points

Good start. But how about:


Deutsche Said:

CAPS Says (out of 5):

Deutsche's Pick Lagging S&P by:

Ericsson (Nasdaq: ERIC  )



45 points




36 points

Overall, Deutsche seems to be racking up more points on its good guesses than it loses on its gaffes. Also instructive: The firm's single-best active mobile telecom pick has a lot in common with the companies discussed in today's upgrades and downgrades. Like China Mobile and China Unicom, VimpelCom operates in a fluid and developing market characterized by astounding growth.

Also worth noting is the fact that VimpelCom's Russian market is closer to saturation (some might say supersaturation) than is China's. As a result, VimpelCom is trying to keep growth going through -- you guessed it -- focusing more on selling value-added services to existing customers (Google (Nasdaq: GOOG  ) is its partner in one high-profile example).

Finally, there's the not-insignificant matter of valuation. China Mobile and China Unicom sell for similar P/E ratios in the mid-to-low 20s. But according to most analysts, China Mobile has by far the greater growth prospects -- nearly twice as fast as China Unicom.

Foolish takeaway
Combine (1) the obvious analogies between Russian and Chinese telecom; (2) the cheaper (if not exactly cheap) price tag on China Mobile, versus the clearly pricey valuation that China Unicom carries; and (3) Deutsche's stellar 89th percentile CAPS rating, and I think the verdict here is clear:

Deutsche has finally hopped off on the right side of the Great Fence of China.

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