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 ...
In my mind, I imagine analysts from all the best Wall Street firms chuckling as they walk into the local Starbucks this morning. There they meet the Cowen & Co. analyst who yesterday upgraded American Eagle (NYSE:AEO). Asking her colleagues "what's so funny," the reply comes back so snappy you know they were just waiting to be asked: "So how does it feel to be a contrarian indicator?" Cowen said to buy American Eagle yesterday, you see. Yet as the rest of the stock market soared, AE dropped 1.6%.

It must be rough working for Cowen these days. With an overall CAPS rating of a very middling 56.56, and a decidedly subpar accuracy record of just 45%, I suspect investors find very little reassuring in a Cowen upgrade. I mean, just look at a few of the firm's picks in the retail clothing sector:

Granted, carnage hasn't always followed in the wake of a Cowen upgrade:

On the whole, you have to admit that Cowen's record is far from encouraging.

But I don't mean to gloat here. Far from it. Fact of the matter is, here at the Fool, we're right fond of American Eagle, which we've recommended in our flagship Motley Fool Stock Advisor investing newsletter. Moreover, I've rated American Eagle an outperformer on CAPS myself, and I even own AE stock (and -- begging your forgiveness -- I'm losing my shirt).

Foolish takeaway
Needless to say, I pretty much agree with Cowen, which predicts that American Eagle will report "strong" August same-store sales of 5%, 7%, or perhaps more. And that such strong results could lead AE management to raise its third-quarter guidance. I've been thinking much along these lines myself, you see, ever since management last month ascribed its weak July performance to "later back-to-school starts," but hinted that "customers are responding well to the back-to-school collection" -- which will heavily color the August sales report due out Thursday.

Furthermore, month-to-month vagaries in sales aside, the stock just plain looks cheap. AE trades for a below-industry-average P/E (price to earnings ratio) of 14, and analysts expect it to grow its "E" at 15% per year over the next five years. Much as I hate to align myself with an analyst who's retail record is hanging on the 50%-off rack, I can't help myself on this one. American Eagle looks fit to be plucked.