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'll be tracking the long-term performance of Wall Street's best and brightest -- and worst and sorriest, too.

And speaking of the best ...
It's not often you see respectable, pinstripe-wearing Wall Street wizards taking their cues from articles published in Women's Wear Daily. Yet that's just what happened yesterday, when investment bankers Jefferies & Co. upgraded shares of Limited Brands (NYSE:LTD) to "buy" based on a column on WWD.com, asserting that Limited intends to sell off its struggling The Limited and Express chains.

As theories go, this one makes sense. Recommending that members of Motley Fool Income Investor buy shares of Limited back in December, lead Income Investor analyst James Early termed Express and The Limited "the corporate laggard, bringing in a quarter of total corporate revenue but losing the business money overall." And if corporate fat is slowing you down, it's time to lose weight. Still, although "buying on the rumor" is a time-honored tradition on Wall Street, it carries with it the obvious risk that the rumor might prove false. So how do we know that Jefferies knows what it's doing by upgrading the stock now?

Answer: We don't -- but we can make an educated guess based on Jefferies' record. Turning to Motley Fool CAPS for the lowdown on its history, we find that Jefferies scores in the top 5% of CAPS players with a 95.21 rating. A few of its better picks over the eight months we've been tracking the firm include:

Granted, it's had its share of blunders as well:

So in Jefferies' favor, we have a couple of points -- a good record of stockpicking overall, and a record of being right at least a bit more often than wrong (the firm's accuracy rating is just under 55%). But it's the arguments against Jefferies' upgrade that have me more interested today. Notably:

• The Associated Press story reporting Jefferies' upgrade noted skepticism among other analysts over the Limited-sale rumor.
• The Fool's own Alyce Lomax, writing yesterday about the WWD.com article, pointed out that rumors of a sale of Express and The Limited have been floating around "for quite some time," and suggested investors "might want to set some limits on their excitement as it relates to such rumors."
• In his investment thesis recommending Limited's shares, James Early expressly addressed the possibility of this sale, concluding: "Unfortunately, [Limited founder, chairman, and CEO Les] Wexner insists he won't sell The Limited stores." I suppose the old gent could have changed his mind in the four months since James discounted the possibility of a sale, but it seems unlikely.

Like I said before, I know that as clever investors, we're supposed to "sell on the news; buy on the rumor." And yet, when I lay out all the facts in front of me, I just don't buy this rumor (as being true).

Of course, to steal a catchphrase from Dennis Miller: "That's just my opinion. I could be wrong." Feel free to doublecheck my reasoning. First, claim a free trial of Motley Fool Income Investor, which will give you full access to James' investment thesis on The Limited. Second, visit The Limited's CAPS page and find out what the No. 1 investor in this company has to say about it.

Then decide for yourself -- just don't forget to tell us by posting a short note on your conclusions before you leave CAPS. We'd love to hear your thoughts.

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 ranked 304th out of nearly 28,000 raters. The Motley Fool has a disclosure policy.