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 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 ...
Multinational megabank Citigroup slapped downgrades on three oil refiners yesterday, sending the stocks into a prolonged skid. Tesoro (NYSE:TSO) and Valero (NYSE:VLO) both got knocked down one spot from "hold" to "sell." Better-known Sunoco (NYSE:SUN) fared only a little better, falling from "buy" to "hold."

Why the 'cross-the-board downgrades? According to Citigroup: "Share price appreciation has benefited from a number of transitory factors that have inflated earnings expectations beyond levels we believe can reasonably be viewed as repeatable." (Which is an interestingly overbroad generalization to make, seeing as of the three, only Tesoro's shares have been significantly outperforming the S&P 500 over the past year -- having risen nearly 60% before the downgrade.)

The "factors" Citigroup refers to were tight gasoline supplies heading into the high-demand summer vacation season. According to Citigroup, though, the tightness owed less to a lack of U.S. refining capacity (which, under the laws of supply and demand, would enable the refiners to raise prices and expand profit margins), and more to a decline in gasoline imports from abroad. Citigroup expects this tightness to loosen a bit as the domestic refiners pump more gas into the system and, therefore, predicts a downturn in margins for the three big refiners.

So in a nutshell, what we have here is a peculiarly made-for-CAPS situation: Citigroup is essentially trying to call the top of an energy cycle, rather than making a judgment based on the companies' intrinsic worth. In so doing, it naturally invites the question: Just how good is Citigroup at calling tops and bottoms in the cyclical energy industry?

Well? How good is it?
Let's turn to Motley Fool CAPS to find out. Overall, Citigroup boasts an impressive record. Just shy of "Wall Street's Best"-status, its combined CAPS rating of 92.60 puts it comfortably within the top 10% of CAPS players. On cyclical energy stocks in particular, here's how it's fared:

Okaaay. So Citi knows coal and gas. What about oil?

Interesting. These are the only currently active up-or-down picks that jumped out at me from Citigroup's active picks on CAPS. They seem to suggest that the bankers are worse at predicting the fortunes of companies trading in liquid hydrocarbons, than of those trading in solid and gaseous forms of energy.

But I say "seem" for a reason. You see, on CAPS, we don't just track and record a company's active recommendations, but its "ended stock picks" as well. And on that list, who do we find Citi racking up big gains on? You guessed it: each of Tesoro, Valero, and Sunoco.

Foolish takeaway
Long story short, it appears to me that Citigroup "calls the bottom" on oil stocks just fine. As for how well it calls the top -- we'll find that out over the next few weeks, months, and quarters, as the three refiners that Citi slammed yesterday either resume their upwards movement, or don't.

Speaking of refiners, you may not know this, but once upon a time, a Motley Fool newsletter titled "Motley Fool Select" recommended Valero for investment. The time was Sept. 2002, and the stock has risen nearly 10 times in value since then. We've since renamed the newsletter Motley Fool Hidden Gems -- and made the analyst who recommended Valero one of the new service's co-lead analysts. Find out what energy stocks Valero-sleuth Bill Mann likes today when you sign up for a free, no-strings-attached, 30-day trial of the service.

Fool contributor 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. 759 out of more than 31,000 rated players. The Fool has a disclosure policy.