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 ...
Cleveland-based equity researcher FTN Midwest upgraded shares of Motley Fool Stock Advisor recommendation Whole Foods (NASDAQ:WFMI) yesterday, sparking a 4.4% rally in the stock.

Uh-oh
Yep. I know what you're thinking: FTN doesn't exactly have a great rep as a stock picker. According to CAPS, the analyst gets three guesses wrong for every two it makes right. As a result, its average pick underperforms the market by more than six points.

Between FTN's reputation as a contrarian indicator and the notable lack of detail supporting its latest pick (no major news outlet provided any detail, beyond noting that the upgrade happened), yesterday's price movement appears to have all the hallmarks of a "sucker's rally." In other words, investors were buying in on the say-so of an analyst that doesn't really have that great of a record. Once they realize to whom they've been listening, they might well stop.

Let's go to the tape
But before jumping to conclusions, and jumping ship on Whole Foods, I'd urge you to look a bit more closely. Examine FTN's record on past picks it's made, and I suspect that you'll find reason to be bullish about this one. Sure, FTN has made some pretty boneheaded recommendations in the past ...

... but many of these picks have been grouped in discrete industries such as housing and small banks. Meanwhile, there is one sector in which FTN has excelled. You guessed it: Retail.

Over the nearly two years that we've tracked FTN's performance, the analyst has gone three for three with retail picks. In this regard, at least, it's batting 1.000, and I see no reason why it can't maintain that performance with yesterday's rec of Whole Foods.

Why? If you read past the title, Alyce Lomax made a pretty strong case for Whole Foods as a future performer in "Another Whoops for Whole Foods." The valuation picture hasn't changed much since, with the organic-supermarket czar still selling for a reasonable 1.3 PEG ratio. And say what you want about the competitive threat from organic wares at conventional supermarket chains such as Wal-Mart (NYSE:WMT) and Safeway (NYSE:SWY), but I just don't believe these two are in the same league as Whole Foods.

Foolish takeaway
Although the slowing economy does appear to be putting the hurt on Whole Foods, the company's gross margin continues to put its rivals to shame. Once it gets its Wild Oats acquisition fully digested, I expect we'll see operating margins return to their prior form -- and watch Whole Foods wholly outperform the market once again.

Having a proven retail star analyst agree with me on this just reinforces my confidence in the stock.