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 tell you what the analysts said and stop there. No, we're here to hold Wall Street to account. We're going to tell you what the analysts said ... and then show you whether they know what they're talking about. Helping us in this endeavor will be Motley Fool CAPS, our tool not only for rating stocks but also for rating the analysts who rate stocks. 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 ...
In further evidence that for every seller on the market, there's an equal and opposite buyer, Longbow Research upgraded Steel Dynamics (NASDAQ:STLD) to "buy" yesterday -- just days after Yours Fooly argued that the shares were overpriced.

The way I see it, if analyst growth estimates are anywhere near correct, the stock's current price gives it a PEG ratio in excess of 2.2, or roughly twice what's ordinarily considered a "fair" price. Longbow begs to differ. Unfortunately, media reports on the firm's upgrade don't tell us exactly why the firm thinks SDI is a buy -- just that the analyst thinks the shares are worth $55 per stub, or 21% higher than they fetch today.

Now, we all know how good of a steel analyst I am (pretty darn bad, actually.) So you may not want to listen to my advice on the shares. The only question remaining is whether Longbow picks stocks any better. Fortunately, thanks to the magic of CAPS, we can figure that out pretty easily, too.

Well? How good is Longbow?
How to put this politely? Let's just say Longbow is showing improvement. When last we checked in on this Cleveland-based independent analyst, Longbow sat in the bottom 10% of Wall Street analysts that we track at CAPS. It's still ranked pretty low on the totem pole, with a sub-20 CAPS rating, but at least Longbow no longer carries our "Wall Street Worst" icon. Moreover, the firm's done a fine job of pulling up its accuracy numbers. No longer getting three picks wrong for every one it gets right, Longbow is closing in on breakeven.

Here are a few of the picks that have helped fuel the turnaround:

Of course, Longbow has missed the target a few times since March, too:

Getting back to basic materials
Of course, what's most important to Steel Dynamics investors isn't necessarily Longbow's record on stocks in general, but its record on steel stocks in particular. So how is the firm doing there? Well, Steel Dynamics is the only active pick (that we're aware of) at Longbow right now. But one interesting feature of CAPS is that in addition to active picks, we also keep record of analysts' "closed" positions -- where a call has gone from "buy" to "neutral" or "sell," for example. Or in Longbow's case, vice versa.

Reviewing this list, we find that Longbow closed out four steel positions this year: U.S. Steel, AK Steel, Nucor, and ... Steel Dynamics itself! Unfortunately, the firm was unable to make any entries in its "wins" column here -- all four picks ended in the red, lagging the market by an average of 22 points per pick. 

Foolish takeaway
Its record aside, could the analyst be right on Steel Dynamics today? Sure could -- but the odds seem against it. Fortunately, we've identified the player with the single greatest record in all of CAPS-dom on Steel Dynamics -- a gent whose pick is currently outperforming the S&P 500 by a whopping 69 points! To learn the identity of this mystery stock picker, just click here.

And for more great stock ideas from the folks who brought you Mittal Steel -- and a 47% outperformance of the S&P 500 on that pick -- step right up and grab a free 30-day trial to Motley Fool Inside Value. You'll be glad you did.

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 605 out of more than 50,000 raters. The Fool has a disclosure policy.