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 …
Spring is in the air (if not yet on the calendar), and as we all know, in spring, young bankers' hearts turn to love. 

And so it was that this morning, investment banker KBW sent a Valentine to its new sweetheart: JPMorgan Chase (NYSE:JPM). Observing that JP's shares currently trade for less than "4.5x normalized earnings," and calling them "attractively valued at approximately 87% of our Stress Case TBV," the analyst upgraded the megabanker to "outperform." In case you're wondering, "TBV" refers to tangible book value. And it looks like the folks at Treasury aren't the only ones conducting stress tests these days. But speaking of tests, do you wonder whether KBW itself passes muster?

Let's go to the tape
Leaving aside the question of whether KBW's own balance sheet is sound, let's focus today on the soundness of this banker's stock picks. Judging from its record on CAPS, KBW spends an awful lot of its time rating stocks in the banking sector. The vast majority of its picks can be broadly described as "financial" in nature. And while these picks haven't always gone well ...

... when you get right down to it, KBW is more often right than wrong (if just barely; its record for accuracy stands at just 53%). In fact, several of KBW's calls have performed quite well:

But is JPMorgan one of them?
The brilliant calls, that is.

I cannot fault the logic of today's upgrade, in that KBW seems to be saying little more than that JPMorgan is one of the safer bets in the sector. According to the analyst: "Despite this very challenging operating environment... we believe its valuation and earnings may pull away from its peers given its improving and leading franchise coupled with its relative balance sheet strength and more manageable capital needs."

Those capital needs, as we now know, got shored up last week when JP made the surprising move to slash its dividend-- a move that will allow the banker to retain $5 billion in cash that would otherwise have flowed out the door to shareholders this year.But while I acknowledge the logic in KBW's reasoning, three things stand in the way of my buying into KBW's buy thesis today:

1. First and foremost, the upshot of the analyst's record on CAPS is this: While it gets more picks right than wrong, it loses so much more on its wrong guesses than it makes on its right that, overall, the average KBW pick tends to underperform the S&P 500 by more than 120 basis points.
2. Second, JP's price-to-book value ratio of 0.6 certainly looks cheap, but the bank currently fails two of the other three tests that Fools traditionally use to evaluate the "invest-ability" of big banks: Its return on equity sits in the low single digits (whereas we tend to look for ROE of better than 20%); and its return on assets is just 0.2% -- while we look for something closer to 2%.
3. Third and finally, I cannot help but notice that for all that KBW professes its love for JPMorgan, this is one of the very few big banks that Warren Buffett has not invested in. 

Now, maybe KBW's better than Buffett. If the banker had a better record at doing what it does, or if JP's own numbers looked a bit better, I might be willing to give this analyst the benefit of the doubt. But things being as they are, and with financials looking as unstable as ever, I'm going to err on the side of caution today, Fools.

In a market like this one, being a relative value just isn't enough. Today, you're better off waiting for an out-and-out steal of a deal.