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 its worst and sorriest, too.

And speaking of the best ...
One of the best stock pickers in the business (or at least, it used to be) upgraded shares of Motley Fool Stock Advisor pick Amerigroup (NYSE:AGP) to "buy" this morning. Hard on the heels of the Medicaid insurer's second-quarter report that announced a doubling of last year's Q2 profit, Stifel Nicolaus cited a reduction in the cost of Amerigroup's business in Georgia as a primary factor in its upgrade.

Investors have had Georgia on their mind all year long. Fears that Medicaid payout costs there would weigh on profits helped to shave nearly a third off Amerigroup's stock price before Wednesday's news. But it wasn't just the Southern savings that helped Amerigroup this quarter. The firm also reversed $10 million in accounting costs that it had reserved against expected health claims that never materialized.

Superb news all around, and between the news, the Stifel upgrade, and a similar upgrade from CIBC on Wednesday, the stock is already up 16% -- even as the rest of the stock market goes to hell in a handbasket. Which raises the question: Is it already too late to buy?

Let's go to the tape
For clues to Stifel's stock-picking prowess, we turn once more to Motley Fool CAPS for a glimpse at its record. There we find the analyst's score back on the upswing since we last checked in. With 53% accuracy and a 95.28 combined rating, Stifel once again sits in the top 10% of CAPS players. Here are a few of the recent picks that fueled its turnaround:

And a couple that provide ballast to that 52% accuracy record:

So is it too late to buy, or what?
Perhaps. Stifel's upgrade came in the midst of the current run-up in stock price. On the one hand, this is bad news for Stifel, which won't get the full benefit of the 16-point run-up on its CAPS scorecard. For you, the investor, though, this means that Stifel thought the stock would go even higher when it released its upgrade in the middle of the run-up -- which bodes well for buying now.

On the third hand, though (the third hand?), remember what I wrote last month about John Edwards' Fuzzy Insurance Math. The presidential candidate argues that insurance companies should spend at least 85% of their revenues directly on health care costs. Amerigroup, however, spends only about $0.83 per dollar of revenue on these costs. I wouldn't be at all surprised if Edwards views yesterday's doubling of profit at Amerigroup somewhat differently from how shareholders see it.

If Edwards somehow gets elected next year -- or if his rivals steal his ideas -- then Amerigroup could be staring at a two-percentage-point reduction in its profit margin in order to meet Edwards' definition of how much an insurer should earn. And while 2% may not sound like much, this company currently only nets about 3%. I have to wonder how investors that are applauding yesterday's doubling of Amerigroup's quarterly profits would feel about a future reduction of two-thirds.

But all of the above is just my opinion. Want to know what the experts at Motley Fool Stock Advisor think about Amerigroup (and our roughly 100 other active recommendations)? It won't cost you a penny to try. To learn what the guys who've beaten the S&P by 37 percentage points over the last five years think about Amerigroup, sign up for a free, 30-day trial today.

And to learn what the very best Amerigroup analyst (as determined by CAPS) thinks about the company, click here.

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. 309 out of more than 60,000 players. Vertex Pharmaceuticals is a Rule Breakers recommendation. Home Depot is an Inside Value newsletter selection. The Fool has a disclosure policy.