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 ...
Shares of funds-transfer agent Moneygram International (NYSE:MGI) got sent flying yesterday morning, buoyed on the wings of a bullish note from Tennessean investment banker Morgan Keegan. Why should Fools care about this? Well, obviously, if they're invested in the company, they'll want to know why it was worth 6% more yesterday than it was just a day earlier. Moreover, even if they don't own Moneygram, members of Motley Fool Inside Value might want to pay attention to this upgrade, for what it tells them about a couple of Moneygram competitors -- ex-Inside Value recommendation First Data (NYSE:FDC) and current pick Western Union (NYSE:WU).

Before we get to that, let's take a quick look at Morgan Keegan's stock-picking record and see just how savvy of an operator we're dealing with here.

Let's go to the tape
As you may recall, the last time we reviewed Morgan Keegan, I came away less than impressed. The firm was less likely than a flipped coin to correctly call a winner, and it sported a CAPS rating so bad that we had to hide it under the fig leaf of "Under 20" to avoid embarrassing its owner.

Four months later, though, things are starting to turn around. While no All-Star, and still getting three out of every five calls wrong, Morgan Keegan is starting to push up the rating -- to 40.88, to be precise. Among those winners as we keep tracking the company, we find:

Its more numerous losers include:

Meanwhile, back at the ranch ...
Getting back to today's endorsement, here's what Morgan Keegan was thinking when it rated Moneygram a buy. From the time Moneygram takes payment from a sender for a funds transfer, to the time it pays out the funds to the recipient, Moneygram invests the funds to earn itself some interest income. Morgan Keegan calculates that as much as $1 billion worth of such investments are currently sitting in the form of subprime mortgage-backed securities and collateralized debt obligations, or CDOs -- the kinds of instruments that have been causing a lot of pain to financial firms these past few weeks. Furthermore, Morgan Keegan says the interest on such investments accounts for roughly half of Moneygram's profits.

Uh-oh
Uh-oh, indeed. This explains why Moneygram's share price gave up more than a quarter of its value over the past couple of months, before yesterday's bounce. And for the edification of Inside Value members, it may also explain the 15% decline in Western Union's stock price. While I can't find anything specifically addressing subprime exposure in that firm's most recent 10-K filing, reference is repeatedly made to Western Union's involvement in the mortgage market, as well as to its investment in "AA-" rated paper -- which may no longer mean what you think it means. That said, Morgan Keegan believes that although "there are certainly risks within the portfolio ... they are more than adequately priced in at current levels.

I'm not so sure. Moneygram sports a trailing price-to-earnings ratio of 16, which looks reasonable in light of its projected 15% annual profits growth over the next five years. But in light of the sizeable risk described above, I think I'd want more than just a "reasonable" price before buying into Moneygram. In fact, I'm pretty sure I'd demand a margin of safety commensurate with the risk -- which is, incidentally, the guiding philosophy behind all of our recommendations at Inside Value. Learn more about what attributes we require, and what companies we've found that possess them, when you take a free, 30-day trial to the service.

Foolish takeaway
Objectively speaking, Moneygram does not look cheap enough to me today. Historically speaking, I'm also less than impressed with Moneygram's other funds-transfer-related pick mentioned above -- Global Payments. That one has transferred 24 points of market underperformance into the portfolios of clients who heeded Morgan Keegan's advice to buy it. Put these two points together, and I don't believe you should heed Morgan Keegan's advice on Moneygram.

Looking for a third opinion on Moneygram? Check out what its CAPS score leader has to say about the stock. For once, it's an honest-to-goodness investment banker that has the best handle on Moneygram -- and one with a much better record than Morgan Keegan can boast.

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. 243 out of more than 60,000 players. The Fool has a disclosure policy.