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 worst …
Investors in Coca-Cola (NYSE:KO) woke to dueling news items Monday, as good news on an alliance with energy-drink maker Hansen Natural (NASDAQ:HANS) vied with bad news -- a downgrade from the securities arm of Teutonic megabank Deutsche Bank.

While acknowledging that Coke's shares "have outperformed a down market," Deutsche worries that "slower volumes at home and abroad [and] currency headwinds" will depress earnings in the year to come. At the same time, Deutsche questions the wisdom of Coke's raising prices 7% to 9% on its products at a time when "Credit is difficult. Job loss is mounting. Confidence is low. And some very large commodity baskets, which have caused the spike, are receding."

Nor is Coke the only object of Deutsche's ire. The banker also slashed 2009 earnings estimates on PepsiCo (NYSE:PEP) and its kin, PepsiAmericas and Pepsi Bottling Group -- Hatfields to Coke's McCoys. (The Pepsi clan, at least, was spared the indignity of a downgrade.)

The reaction
Weighing the two items -- the Hansen partnership on the one hand, the downgrade on the other -- investors hedged this morning, knocking Coke shares down 3%. Not as bad as the rest of the market is hurting, sure. But does Coke deserve even this much of a drop? Just how good of an analyst is Deutsche Securities, anyway?

Let's go to the tape
Not so good, as it turns out, at least according to CAPS. In fact, in all likelihood, you (yes, you, my friend) are a better stock picker than Deutsche. Having tracked the banker's performance for well over a year now, our CAPS database confirms that Deutsche underperforms more than 80% of CAPS investors -- precious few of whom own their own investment banks.

On average, 56% of the time Deutsche tells you to zig, you should zag instead. For example:

So is this one of those "zag" times?
Allow me to surprise you: No. I realize I've been disparaging Deutsche's record for five paragraphs now, but the fact of the matter is that I agree with the banker on this one -- for several reasons.

For months, I've been warning that the same currency exchange rate fluctuations that lifted Coke's results in the past hold the potential to reverse course and turn into the "headwinds" that Deutsche now predicts. If the U.S. dollar appreciates against foreign currencies, then revenue generated abroad will translate into fewer dollars earned here back home.

Similarly, I agree with Deutsche's concerns over Coke's pricing policy. Sure, the surge in commodities prices has acted to depress Coke's margins. Yes, I understand the company's desire to raise prices to cover its costs. But I cannot imagine a worse time to be hiking prices than in the middle of a recession -- with the sole exception, perhaps, of raising prices in the middle of a recession and at the same time as commodities costs are dropping.

Foolish takeaway
Call me a pessimist, but I can't see how this strategy will do good things for Coke's sales. Rather, I would expect the opposite. Meanwhile, with Coke trading for a 21 P/E against long-term growth estimates of less than 10%, I already see little if any margin of safety in this one. Slowing growth is only going to make a bad valuation worse.

On Oct. 7, 2008, Fool co-founder David Gardner and his Motley Fool Pro team will invest $1 million in a portfolio designed to help you make money in any market. In the coming weeks, the team, relying heavily on proprietary CAPS "community intelligence" data, will establish long and short positions in a broad range of securities, including common stocks, publicly traded put and call options, and exchange-traded funds (ETFs). To learn more about Motley Fool Pro and to receive a private invitation to join, simply enter your email address in the box below.