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 just 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 ...
Yesterday morning, financial umbrella stand Citigroup voiced renewed optimism about the stock of Apple (NASDAQ:AAPL). In a detailed research note, the firm predicted that Apple's new hardware offerings, the iPhone and Apple TV, would yield new revenue streams totaling as much as $6 billion in 2008. It also said that in the nearer term, Apple's new Leopard operating system, updates to popular professional software programs, and Adobe's new Creative Suite 3 software would also boost iSales.

Of course, revenues are one thing, profits quite another. Perhaps referring to competing analyst houses JP Morgan and JMP Securities (no relation), both of which cut their ratings on the stock to neutral last month, Citigroup argues that everyone else on Wall Street is wrong about Apple's profitability -- including Apple itself. Whereas the iPod maker predicts it will gross 29.5% on its sales this quarter, and much of the Street is going along with that estimate, Citigroup begs to differ. Citing lower costs for DRAM and flash memory used in Apple products, and arguing that Apple need not cut prices in tandem with falling component costs, Citigroup predicts the firm will earn gross margins of 31% to 32%.

Going against the herd is (pardon the pun) close to unheard of on the Street, where analysts prefer to move in packs. So what are the chances that Citigroup is right in its independent analysis? Only time will tell for sure. But for now, we can at least check out the firm's record on CAPS and see how it stacks up against the competition.

On Apple in particular, Citigroup has done pretty well -- the last time it stuck a buy rating on Apple, the stock went on to outperform the S&P 500 by a good 10 percentage points (from March through October 2006). Moreover, in comparison to its more skeptical rivals, Citigroup boasts a superior CAPS score overall. At 98.64, it eclipses those of both JP (96.85) and JMP (85.59).

What's Citigroup done to earn it this rating? Let's take a look at some of its better picks:

(And here's a couple that didn't work out so well ...)

I have to admit: Citigroup's upgrade has me feeling a little nervous. The company's built up a fine reputation for making smart picks generally, and its logic on Apple sounds, well, sound. And yet I've taken the opposite tack and tagged Apple as an underperformer in CAPS, based on what I consider an inflated valuation.

Who's right? Who's wrong? Well, that, my friends, is the beauty of CAPS. Whoever ends up playing the goat, there's no way of hiding it. Our predictions, and our records in making them, are preserved for all eternity for your review. Drop by CAPS any time and hold us to our word. And while you're at it, make sure to contribute a few thoughts on your own favorite stocks.

Motley Fool CAPS: It's fun, it's free, and it just might make you famous.

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 46 out of more than 22,000 raters. JPMorgan Chase is a Motley Fool Income Investor choice. The Fool's disclosure policy has a click wheel.