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 track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

And speaking of the best ...
Emboldened (perhaps) by its (so far) successful recommendation of DirecTV (NYSE:DTV) earlier this week, Wall Street equity shop Pali Research boldly forged back into the tele-sphere yesterday with a pair of new initiations. Survey says ... sell AT&T (NYSE:T), buy Verizon (NYSE:VZ).

Buy why?
Making the best use of Microsoft Word's underpraised cut-and-paste feature, Pali wielded one and the same argument to both slay AT&T and save Verizon: "As the wireless industry passes 90% penetration, growth in revenue and profitability becomes a market share game demanding that investors pick winners and losers ..."

Pali predicts Verizon will be a "winner" based on its "best in class network and strong customer care. Verizon ranked No. 1 in our Q2 survey of customer care response times." Pali further predicted that "disgruntled AT&T customers" will flee to Verizon over the next several years as their two-year iPhone family plan contracts expire. Pali sees AT&T's net new subscribers dropping to "less than 1 million in 2010 from more than 4 million in 2008 and to turn negative in 2011."

Which is a pretty bold prediction, you must admit. Pali's saying that AT&T, which has gained customers in a recession -- albeit with some help from Apple -- is going to lose customers over time, even as the economy regains strength. Hard to believe.

Let's go to the tape
And it gets harder. Earlier this week, I praised Pali for its strong record of picking winners such as Time Warner (NYSE:TWX) in media stocks. Fairness dictates that I point out, too, that Pali's telecom picks have failed to impress lately:

That said, fairness also requires that I mention how good a job Pali has done on telecom historically. None of Pali's active recommendations in telecom are currently outperforming the market, but over the two years and more that we've watched this company operate, Pali has racked up an even record of 50% accuracy in telecom. It's really nailed some picks, while its misses aren't down substantially for the most part. Sprint, in particular, where Pali's now just treading water, generated 47 percentage points' worth of market outperformance for Pali when the analyst panned it in 2007.

Verizon vs. AT&T
Now personally, I'm more of a value and a growth investor. When I look at Verizon and AT&T, selling for 13 and 11 times earnings, respectively, and both being pegged for less than 4% long-term profit growth -- I'm unimpressed.

Granted, both stocks pay out strong, 6%-plus dividends, so I can see why an income investor would find them attractive. But neither firm is doing a whole lot of growing. And in fact, considering that Verizon is slightly more expensive than AT&T and pays a slightly lower dividend, my hunch is that an income-seeking individual might actually be better off buying the stock Pali says to sell, and selling the one it advises buying.

Foolish takeaway
That said, even if you think like I do, I'd urge you to reserve judgment on these two stocks. Based on Pali's record, it's clear that this analyst knows a thing or two about long-term investing. If dividends are your thing, then your best bet is to buy the stock that Pali prefers: Verizon.