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 ...
As Earnings Eve approached, AmTech Research decided yesterday that discretion was the better part of valor when it comes to Apple (Nasdaq: AAPL), downgrading the shares to neutral. Meanwhile, next door at Lehman Bros., the motto would appear to be "fools (small ‘f') rush in where AmTech fears to keep treading." That analyst jumped in with an outperform rating on the fruity computer maker.

Lehman takes a product-centric approach with its initiation, arguing that a "strong product mix including new iPhone and notebooks" will lift Apple's profits when it reports this afternoon. AmTech doesn't necessarily disagree, instead attributing its pessimism to the stock's 40% run-up over the past month. Says AmTech: "While we believe Apple will report a strong quarter relative to guidance and published consensus estimates, we are concerned whether it will be good enough and whether investors will be as forgiving with conservative guidance." (Memo to Apple: Underpromise today, and your shares may pay the price.)

So who's right?
On average, neither one of 'em. You see, we've been tracking both AmTech's and Lehman's performance for 18 months or more on CAPS. The upshot: Both AmTech and Lehman are more often wrong than right, with the former scoring a 48% record for accuracy, and the latter 47%. Reviewing a few of their respective tech picks, we find:

Meanwhile...

And yet, when it comes to Apple, both of these analysts appear to have the magic touch. Through yesterday's downgrade, AmTech had racked up an astounding 138 points' worth of market outperformance on its buy rating. And Lehman appears to have lucked out -- the analyst gets credit for 94 points on Apple by virtue of its own laziness.

You see, Lehman recommended this stock back in March 2007. According to Briefing.com, Lehman then proceeded to reiterate its buy rating two more times -- then dropped coverage, but failed to tell anyone about it. Reasonable investors, not knowing that Lehman was no longer watching Apple grow, would assume that the buy rating remained in force, and so at CAPS we kept the position "open." Result: We've got Lehman down as recommending the stock all the way from March 2007 through today -- and collecting 94 points worth of market outperformance as a result. (You're welcome, Lehman.)

So wait, they're both right?
You could draw that conclusion from the data, yes. Both analysts are of middling quality generally, but have done really well with Apple in particular. So the way I'd read AmTech's downgrade and Lehman's positive "initiation" would go like this:

Apple's products are selling well (Lehman) and the stock is slightly overpriced (AmTech). And for the record, with Apple selling for 35 times its trailing earnings (or 25 times trailing free cash flow), and expected to grow at about 23% per year, that's pretty much my opinion of the stock as well.