This Just In: Upgrades and Downgrades

We at The Motley Fool 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 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 ...
When I began penning this column for the Fool four months ago, I expected to learn as much as I revealed to you, the reader. I expected to discover proof of the accepted wisdom that there are a lot of mediocre analyst firms out there. I expected to find a few good ones as well -- and a few interesting companies that I'd never before considered. What I never expected was that by focusing on the folks who make the ratings, I'd discover a firm within my own bailiwick that I'd never heard of before.

That happened this morning, when one of the good ones, BMO Capital Markets, initiated coverage of Capella Education (NASDAQ:CPLA) with an outperform rating.

Through columns such as "Too Cool for School?" and "Extra Credit Investing," and through CEO interviews like "Fools Want to Know, With Apollo Group," I've become pretty familiar with the big names in for-profit education -- Apollo Group (NASDAQ:APOL), of course, for one. And Motley Fool Hidden Gems Watch List stock Strayer Education (NASDAQ:STRA). But Capella was one that flew entirely below my radar.

Until now
How did Capella escape my notice? Perhaps because the firm only began trading publicly late last year. Now that I see the company, though, I think it's worth watching. A strictly online operation -- traditionally the highest-margin, fastest-growing segment in for-profit education -- Capella trades for a pricey 39 times trailing earnings, and 31 times next year's estimated profits. Profit margins that lag many of its peers make this valuation seem out of whack at first glance. But when you notice that the five analysts following the firm have it growing far faster than any of its rivals over the next five years -- at 26.5% per year -- that may explain the premium that Capella commands.

Worth the price?
Well, is it? Having just discovered Capella myself, I'll refrain from passing judgment on the stock's valuation. Instead, let's focus on BMO's upbeat assessment. Just how good are these guys at finding undervalued equities and predicting their outperformance?

Pretty good, as it turns out. Examining the firm's record on CAPS, we see that BMO is one of "Wall Street's Best" analysts, sporting a superb 96.67 rating, despite having an accuracy rating just a little better than breakeven (56%). Over the last few months, it's picked the following winners:

Foolish takeaway
Two things jump out at me that mitigate a generally favorable impression of BMO's performance. First, the analyst seems to prefer NYSE-listed companies to their smaller, often faster-growing kindred on the Nasdaq. I wonder how well BMO's experience on one exchange will translate to the other. Second, I notice that BMO hasn't issued any up or down ratings on any of Capella's for-profit educating peers in recent months, raising the question of how well the firm knows this particular industry.

BMO's latest pick doesn't look like quite the slam-dunk that the firm's CAPS rating would initially suggest, but put it all together and I'm cautiously optimistic. Proceed with caution.

Meanwhile, if you'd like a second opinion on Capella to backstop BMO's, make sure to check out what the score leader for Capella has to say about the company. You can learn the identity of this mystery stock picker, and find out what he (or is it she?) thinks, when you visit Capella's CAPS page.

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. 1,812 out of more than 29,000 raters. The Fool has a disclosure policy.