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 worst and sorriest, too.

And speaking of the best ...
And the hits just keep coming at Home Depot (NYSE: HD). Down nearly 30% over the past year already, the nation's premier home improvement retailer followed the market just a bit deeper into the red yesterday, dragged down in part by the fact that it picked up another downgrade. The culprit this time was a banker named Morgan -- but not the one that's been in the news so much this week.

Fact is, JPMorgan actually likes this stock and rates it a buy. It's Morgan Keegan that's soured on the shade of Big Orange this week and advised us to sell. While Home Depot continues to predict a continuing operations earnings decline of 19% to 24% this year, Morgan Keegan says a 27% fall in earnings per share (not quite what the company discussed) is more likely.

If Morgan Keegan is right, this probably means Home Depot is headed for an earnings miss. The analyst worries that even the Feds' much-vaunted "stimulus checks" won't save Home Depot. Why? Because suddenly flush ($600? Woo-hoo!) homeowners are unlikely to invest their windfall in homes that have become a depreciating asset. (They're more likely to use the cash to pay off the bills for past home improvements they've charged to their credit cards.)

Depressing analysis? Yes. But is Morgan Keegan right? Perhaps yes -- in the short term.

Let's go to the tape
The odds favor Morgan Keegan on this one, if just barely. With a record of 51% accuracy on its recommendations, this All-Star CAPS player gets its calls right a bit more often than wrong. For example:

Especially noteworthy among the above picks are the two home furnishings stocks that Morgan Keegan panned -- correctly. But this analyst hasn't always been so lucky. Consider also:

So here on the flip side of success, we find Morgan Keegan doing badly on two other stocks tied to the housing market -- Furniture Brands and Lowe's. I suppose these results shouldn't really surprise us. Remember that while right more often than wrong, Morgan Keegan is just barely so. That 51% accuracy suggests we should expect the analyst to be wrong about as often as it's right.

And to be honest, I'm not certain the results with Home Depot will do much to improve Morgan Keegan's reputation for accuracy. The stock sells for right around 11 times trailing earnings, and most analysts believe Home Depot can grow at about 11% per year over the next five years. The resulting PEG ratio of one tells me this stock is, at worst, fairly valued -- and far from a clear-cut sell.

Foolish takeaway
I can't argue that Home Depot won't miss earnings this quarter -- or this year. Morgan Keegan could well be right about that. The housing market is still a mess, and an earnings miss -- or two, or three, or four -- could certainly be in the cards.

But I know two things for certain:

• Long term, this recession will end, and when it does, Home Depot will still be here, selling hammers and nails, paint brushes, and tile flooring, ready and able to profit from the recovery.
• When that recovery comes, you're going to wish in vain for a chance to buy this market dominator for a mere 11 times earnings.

The time for the patient investor to buy Home Depot is now.