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 worst ...
"Contrarian indicator." It's a mean label to slap on a hard-working banker, but sometimes it's well-deserved. When an analyst is wrong twice as often as right, then at best you want to ignore that analyst's advice, and, at worst, you might want to bet against him. Case in point: Wall Street wizard Needham & Company, which ended last week by closing out its neutral opinion on American Eagle Outfitters (NYSE: AEO) and replacing it with an "underperform" rating.

I have to admit that my first impulse on hearing the news was to run out and pick up some AE shares, because when it comes to professional stock pickers, there are few worse than Needham. With a CAPS rating of "Below 20" (meaning that at least four out of five investors do better on their own than listening to Needham), and a record of getting 65% of its guesses wrong, when Needham speaks, people listen ... and then do the opposite (if they're smart). A survey of a few of the analyst's wrong turns tells you why:

And now Needham comes out and tells us, in effect, to sell AE, even though the retail clothier is trading near its 52-week low, priced at a mere nine times trailing earnings, while expected to grow at 14% per year over the next half decade. Really?

Crazy like a fox
While Needham's recommendation goes against everything I hold dear as a value investor -- single-digit P/Es and double-digit growth rates, to name two -- I have to give credit where credit is due. This banker may be one of the poorer tech analysts out there, but when it comes to clothing chains, Needham knows its stuff. See for yourself:

Question authority
When I'm investing in stocks, I hold valuation above all other standards. It's king of the hill in how I decide whether to buy or avoid a stock, but it sometimes pays to question authority. AE looks cheap to me, and now that a generally bad analyst is now panning the stock, I'm interested in owning it.

But the fact that this generally bad analyst is specifically good on retail clothiers has me second-guessing my assumptions about value. My advice: Give this analyst's recommendation some serious consideration.