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 ...
What do you do when one of the best stock pickers on the Street gives a buy rating to arguably one of the worst businesses in the nation? I don't know about you, but personally, I listen up.

Just this morning, BMO Capital Markets upgraded Blockbuster (NYSE:BBI) from "market perform" to "outperform," saying this movie "rentailer" (isn't it fun inventing new words?) is "in the best position to capture significant consumer dollars in the home video entertainment business." That's right, Fools. Not Motley Fool Stock Advisor recommendation Netflix (NASDAQ:NFLX). Not Movie Gallery (NASDAQ:MOVI). Blockbuster.

The same Blockbuster that's down 40% over the last year. The same Blockbuster that's lost more than $100 million, and burned through more than $125 million in cash, over that same year. Say it with me now, all together:

Huh?!
Is BMO off its meds, or might there be more to this upgrade than meets the eye? For a clue as to whether BMO has, well, a clue, let's take a look at this analyst's record, as tracked by CAPS.

As I've already hinted, BMO ranks among Wall Street's top 10% equity houses, boasting a CAPS rating of 98.29 and a record of calling its picks right 58% of the time. Taking BMO's hint that Blockbuster's business model best resembles retail, let's examine a few of BMO's wins and losses in that industry. Stocks in its "wins" column include:

But even the "best" get it wrong from time to time, and BMO has made its fair share of bum calls:

I have to say, I don't see much of a pattern here. When it comes to pure-play retailing of clothes, computers, and assorted other merchandise, BMO's record speaks to neither excellence nor failure.

Foolish takeaway
So what's an investor to make of BMO's assertion that Blockbuster is "oversold"? At the surface level, Blockbuster's business looks well and truly broken. These guys can't seem to earn a profit, and they're burning cash so fast you'd think they'd run out of heating oil with winter coming on. But according to BMO, Blockbuster's fallen so long and so hard that, this time of year, much of the selling could be of the "tax loss" variety. That would mean investors are salvaging what they can of their Blockbuster investments by selling their shares and claiming the losses on their tax returns. Come 2008, they could well shout in unison, "$3 a share is cheap!" and rush right back into the stock, lifting the shares.

More substantively, BMO argues that things are so bad for Blockbuster, they can't get much worse. In fact, things might even get better if cash-strapped consumers decide to rent more movies as an alternative to driving to the theater, or watching endless reruns and "reality TV" as the Hollywood writers' strike drags on. Personally, I suspect either of those trends would more likely favor the company that's brought Blockbuster to its current lows -- Netflix -- than help Blockbuster itself. But far be it from me to contradict one of the kings of Wall Street.