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 ...
Hear ye, hear ye! The summer travel season has begun! But no sooner did Memorial Day weekend pass than Prudential dumped a bucket of ice water over one of the nation's most be-LUV-ed travel facilitators, Southwest Airlines (NYSE:LUV), downgrading the stock to "underweight."

What's the insurance powerhouse got against Southwest? Well, according to the analyst, Southwest derives most of its profits from routes in ... the Southwestern states, and this has been the case for the past three decades. Says Prudential, 61 of the 73 markets that Southwest has expanded into since early 2003 are "consistent money-losers." Given that the airline is still adding capacity at the rate of 35 new planes per year, Prudential seems to believe Southwest has passed the point of diminishing returns, and the bigger it gets, the harder profits will fall.

The argument certainly sounds logical, but considering that Southwest carries a market capitalization as big as the next two most valuable airlines combined (UAL (NASDAQ:UAUA) and AMR (NYSE:AMR), if you're wondering), investors clearly believe Southwest's future is bright. Which brings us to the question: Is Prudential smarter than the rest of the stock market? For insight into the answer, we turn once again to Motley Fool CAPS to learn how well Prudential's picks have done in the past.

There we see that while not quite the world's best stock picker, Prudential still commands an "All-Star" rank with a CAPS rating of 86.41. It's also right with its picks slightly more often than it's wrong, with an accuracy rating of 51%.

Reviewing its record, we find Prudential making the following right (and wrong) calls:

Cleared for landing
Based on the above, I think it's pretty clear that Prudential's overall accuracy rating of 51% doesn't do its airline industry analysts justice. These guys clearly know which airlines are airworthy and which are not, as demonstrated by the 83% accuracy they're achieving within this particular industry.

For that reason, I'd pay close attention to Prudential's downgrade of Southwest Airlines. While I wouldn't necessarily sell the stock based on a single analyst's opinion -- even one as good as Prudential -- I'd certainly think twice before buying in. Speaking of which, if you're looking for a second opinion on Southwest, you need look no further than CAPS. I think you'll recognize the name of the current score leader on the stock -- it's none other than CNBC's Jim Cramer. Click here to visit Southwest's CAPS page and find out whether Cramer agrees with Prudential's take on the stock.

If by that time you're leery of investing in Southwest, but still interested in an airline pick, grab a free 30-day trial of Motley Fool Stock Advisor and find out what airline the Fool's own David Gardner prefers over Southwest.

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 No. 1,112 out of more than 29,000 raters. The Fool has a disclosure policy.