This Just In: Upgrades and Downgrades at Prudential

At The Motley Fool, we have our fun with the Wall Street analysts.

We mock their pinstripe-and-wingtip attire. Their multimillion-dollar bonuses. And, not unrelatedly, their failure to recognize the tech bubble -- or worse, their recognizing it, and then putting lipstick on the pig and pimping it to the individual investor. What's more, their ceaseless stream of upgrades and downgrades, sometimes on one and the same stock and just days apart, make Jim Cramer look like a poster boy for the "long-term buy-and-hold" movement.

Thus, it may look a bit out of place for us to introduce this newest occasional feature: This Just In. Here, I'll be taking an ad hoc magnifying glass to some of the hottest analyst upgrades and downgrades of the hour.

Isn't that a little hypocritical?
Guilty as charged -- if that were all I was doing. Because the fact of the matter is that an analyst's upgrading or downgrading a stock means little when viewed in isolation -- all the more so when you consider the heft of the firms doing the "analyzing." When a major brokerage firm issues a downgrade, the mere publication of the news often suffices to spark a selloff, "proving" an analyst right -- in the short term.

What's more significant is the analyst's record over the long term. And that's what we'll be focusing on in this column.

Mr. Market? Meet Mr. CAPS.
With the debut of Motley Fool CAPS, the Fool's new tool for rating everything from stocks to investors to analysts to the long-term durability of the Toyota Corolla (give us some time on that last one), we're taking a magnifying glass not just to the short-term meanderings of Mr. Market's mind. 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 ...
Early Monday morning, Prudential upgraded the stocks of two consumer-goods companies, Clorox (NYSE:CLX) and Kimberly-Clark (NYSE:KMB), to "overweight." In each case, Prudential justified its shift in stance by citing declines in raw-materials costs and their ability to boost the target firms' gross margins.

Good news, you say? Time to buy some bleach and Kleenex? Well, maybe yes and maybe no. In the investment-banking world, Prudential changes its views on stocks so often, it's the next closest thing to a day trader. Maybe it doesn't change its mind "Jim Cramer often," but hardly a quarter goes by without Prudential upgrading or downgrading the stocks it follows.

And the company isn't always right. Over its last two changes of opinion on Clorox, Prudential has outperformed the S&P 500 by 7 points (from its October 2005 downgrade) and underperformed by 3 (from its February 2006 upgrade), for a grand total outperformance of 4 points.

On Kimberly-Clark, it's done even better, racking up a 5-point lead on its March 2006 upgrade and tacking on 3 more points when it downgraded in July.

Overall, Prudential is right more often than not -- if only 51% of the time -- and maintains a respectable 88.93 combined rating on CAPS, where we track its picks.

Let's look at some of the firm's recent recommendations, in terms of the companies that have helped to earn Prudential the coveted rank of "CAPS All-Star":

And one that's held the firm back:

Prudential's habit of changing its view whenever the wind shifts direction may seem logical -- after all, when oil prices drop, companies that use energy to fuel their manufacturing machinery, or petrochemicals to form their products, do stand to benefit. But the firm's commitment to playing this short-term, macroeconomic guessing game undoubtedly contributes to its tight good-to-bad-calls margin. Mind you, I'm not saying that Prudential is wrong about Clorox and Kimberly-Clark today -- just that it's not really telling you anything you couldn't have figured out yourself.

In evidence, 2,276 CAPS players -- most of them individual investors without computer banks and armies of analysts at their disposal -- are currently outperforming Prudential on CAPS. Who understands Clorox and Kimberly-Clark best? You may be surprised to learn that the highest-rated CAPS players on both stocks aren't investment banks at all.

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 30 out of more than 20,000 raters. The Fool has a disclosure policy.