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 this column, I generally argue that if investors listen to analysts at all, we should focus on listening to the best analysts. While "past performance is no guarantee of future success," it just stands to reason that an analyst with a sterling track record is more likely than a lesser peer to be right in its predictions.

Today, I want to add a caveat to that general rule: When making the prediction in question, the analyst in question must not come off the wrong way. Unfortunately, that's exactly what star analyst Bernstein sounded like yesterday, when explaining its decision to initiate coverage on Capital One (NYSE:COF) with an outperform rating.

Don't get me wrong
Listen, Bernstein is a fine analyst. It boasts an enviable 93.83 CAPS rating, and a record of getting its picks right 75% of the time. In fact, the four financial-ish stocks we have on record for Bernstein exhibit precisely this 3-up-1-down record for accuracy:

But Bernstein's record aside, its argument in favor of Capital One makes no sense to me. According to the analyst, investors still think of Capital One as a "credit card company," whereas now that Capital One has purchased both Hibernia and North Fork, investors should be treating it as a bank -- and giving it the kind of multiple to earnings that banks normally get. Opines the analyst: Once investors catch on to Capital One's new status, the shares should rise 40% in value in relatively short order.

Now, I'm no shareholder mind reader. I can't tell you whether investors think Capital One is a credit card company, a bank, or an entertainment conglomerate (some of those "wallet" commercials are pretty cool). What I can say, though, is that the stock already fetches multiples entirely in line with what other bank stocks command. Its stock trades at 10 times trailing earnings -- par for the course with the multiples you'll find at Bank of America (NYSE:BAC), Washington Mutual (NYSE:WM), or Wachovia (NYSE:WB). True, the projected growth rates differ among these four "banks," but not by more than a percent or three.

Foolish takeaway
To me, Capital One looks attractively priced. A 10.1 P/E with 10.7% projected profits growth looks fine to me. But 40% undervalued, based on a guess at investor logic and a stretched valuation premise? That's crazy talk.

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