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 its worst and sorriest, too.

And speaking of the best ...
Yesterday, analyst shop Matrix Research downgraded the stock of Red Robin Gourmet Burgers (NASDAQ:RRGB) from hold to sell. Whether this caused the stock's subsequent 5% fall from grace, or whether Robin just got itself caught in the general market downdraft yesterday, I can't say. (I mean, can a butterfly fluttering its wings in China really bring down a bird-named restaurant chain in the U.S.?) What I can tell you, though, is that we're tracking Matrix over on Motley Fool CAPS, and these guys do seem to know what they're talking about.

That being?
Not that they're talking much. Aside from the downgrade itself, we don't know much else about why Matrix is down on the Robin. As CAPS All-Star mrchw has observed about the company (over on the Fool's Liquid Lounge discussion board), "Matrix is a total black box company. They run the financials using an EVA approach and then rank every company they cover based on this. The top 20% get strong buy, the next 20% get buy, the next 20% hold, the next 20% sell, and the bottom 20% strong sell."

How well does this work? Professional money manager and all-around good Fool theGreenMartian observes that Matrix has "a distressing habit of being absolutely rational with their upgrades & downgrades. ... The last thing we need is a research shop worth listening to." The firm's CAPS record backs up Greenie's assessment, showing that Matrix scores just shy of the top 10% bracket of CAPS players with an 89.81 rating.

Herewith, a few of its more successful picks. The highest CAPS rating possible is five stars.

And a few spectacular blunders:

Reviewing the firm's picks, I'm pretty impressed with its outperform calls -- but at the same time, I'm alarmed at the number of Matrix's "underperform" calls that have gone horribly wrong. Nine of its top 10 worst scores can be traced back to blown underperform ratings -- a record suggesting that investors might want to think twice before acting on a Matrix sell rating. In contrast, eight out of 10 of Matrix's best scores ever originated from outperform ratings.

Granted, the last time Matrix tagged the Robin with a sell rating, the stock proceeded to lag the S&P by 23 points before Matrix upgraded it to neutral, but still, the overall trend at Matrix shows that it's most at risk when it's the most pessimistic.

Considering the conflicting signals you get from Matrix's record, you might want to check out what your fellow investors are saying about the company before deciding how to react to yesterday's downgrade. Fortunately, more than 100 Fools have already rated Red Robin for you over on CAPS. Find out what they have to say, and check the views of the top scorer on the stock in particular (find out who it is here), before making your move.

If you must know, Fool contributor Rich Smith actually prefers Fuddruckers when he's splurging, and Mickey D's when he's on a budget. He does not own shares of any company named above. You can find Rich on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked 36 out of more than 23,000 raters. Dawson Geophysical is a Motley Fool Hidden Gems pick. Bankrate is a Rule Breakers choice. The Fool has a disclosure policy.