This Just In: Upgrades & 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 tell you what the analysts said and stop there. No, we're here to hold Wall Street to account. We're going to tell you what the analysts said ... and then show you whether they know what they're talking about. Helping us in this endeavor will be Motley Fool CAPS, our tool not only for rating stocks, but also for rating the analysts who rate stocks. 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 ...
One day after suffering the injury of an earnings miss, vacation deal-finder Travelzoo (NASDAQ:TZOO) received a welcome surprise yesterday. Rather than being insulted by Wall Street for its performance, it got a pair of compliments: ratings upgrades from Stifel Nicolaus and First Albany. The former removed its sell rating on Travelzoo, replacing it with a hold. The latter did a complete 180, going from "underperform" to "strong buy" in a nanosecond.

But the way I see it, both firms will rue the day they made this call.

Let's go to the tape
Not that these aren't both sharp stock pickers. According to CAPS, First Albany has a 94.76 rating, putting it in the top 10% of CAPS players (if not in the top 10% of professional Wall Streeters). Stifel has done even better. Its 99.00 rating puts it in the top 1% of players, but again, that's a bit short of the Street elite. As is our wont, let's review a few of each firm's best ideas:

Meanwhile:

So why do I think First Albany and Stifel will regret upping their ratings on Travelzoo? Because they jumped the gun. In the wake of Travelzoo's earnings miss, the stock dropped sharply in Tuesday evening after-hours trading. TheStreet.com sighted it at $29.72. AP quoted Stifel as removing its sell rating when it saw "TZOO" hit $29.80. Both stock pickers promptly jumped in with upgrades, probably expecting the shares to open down, giving some room for the stock to grow into their new ratings.

As it turned out -- perhaps inspired by the upgrades themselves -- shares opened 1% higher yesterday morning, vaporizing the analysts' expected margin of safety. That might not be so bad if the analysts had had a real business reason for their optimism, but news reports cited First Albany as basing its thesis largely on "shorts" needing to close out their bearish positions at some point, and Stifel as basing its rating specifically on the after-hours price of the stock.

Meanwhile, the Fool's own Rick Munarriz, an analyst with our S&P-walloping Rule Breakers newsletter and a longtime follower of Travelzoo, has his doubts about the company as a business. He argues that Travelzoo's business model may be "too simple" and too easy for competitors to clone, and that this will in ultimately crimp the company's ability to raise prices and curb its growth prospects. Given the choice, I'd rather go with stock analysis based on a firm's business model, rather than its ticker prospects.

Looking for a second opinion? Or in this case, a fourth or fifth? The current score leader on Travelzoo is also the No. 7 stock picker in all of CAPS -- and he's calling Travelzoo an underperformer. Click here to find out who he is, and here to learn why he's feeling surly on the stock.

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 52nd out of nearly 22,000 raters. Omniture is a Motley Fool Stock Advisor pick. The Fool's disclosure policy is a world traveler.