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 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 track the long-term performance of Wall Street's best and brightest -- and worst and sorriest, too.
And speaking of the best ...
Do you own an airplane? Doesn't matter if it's a Boeing
Wednesday was a happy day for airline investors, as the Swiss megabank slapped "buy" decals on every airline stock within reach: Continental
Things that make you say: "Hmm"
But the more I look at UBS's across-the-board upgrades, the less I see the logic in investors' elation over the news. I mean, sure, UBS has a good rep and a high-flying 90.37 CAPS rating. But much like Lehman Brothers, whom we examined yesterday, UBS climbed into the top decile of CAPS players more by virtue of its "volume, volume, volume" ratings than because of any particular accuracy in its picks. As a matter of fact, with its accuracy teetering midway between 51% and 52%, UBS's guesses (it rhymes!) aren't that much more accurate than flipping a Swiss franc.
Think first, then speak
And then there's the reasoning behind the banker's upgrades. According to UBS, it's placing bullish bets on the airlines in hopes that "airline management teams will finally play the consolidation card in 2008." UBS expects to see a major merger by mid-2008, possibly between Delta and Northwest, followed by a domino effect that topples Continental into UAL's waiting arms.
Now, that's fine as far as it goes. I do see the logic of airlines wanting to consolidate, minimize competition, and march toward -- if not monopoly, then at least oligopoly. But I have two problems with UBS's prediction. First, its hopes for a buyout binge notwithstanding, UBS avers, "We're bearish on the airline fundamentals as they stand today." But if that's true, I fail to see why UBS thinks we should own any airline, merged or otherwise.
If UBS believes buyouts are in the offing, it really should recommend that you buy the targets' shares and short the acquirers. After all, when mergers take place, they often follow this three-step dance:
- A announces it will pay a ridiculous premium for B.
- Investors bid up B's shares to something near the premium price.
- Investors punish A for overpaying by selling off its shares.
Seems if UBS is so darned prescient that it can see the future (as suggested by its CAPS rating), it should be sparing investors the pain of going through Step 3 and just go the extra mile with companies that will benefit from Step 2.