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 ...
Multinational megabank Citigroup downgraded Level 3 (NASDAQ:LVLT) to level zero this morning, when it tagged the telecom-services provider with the rarely heard (on Wall Street) rating of "sell."

But it's not as if Citi had been bullish on Level 3: The stock carried only a neutral rating before this morning's downgrade. As for why the downgrade happened, Citi now thinks that the telecom-services sector is going to post, at most, 3% revenue growth this year -- down from previous estimates of 4%. That drop will compress valuations across the industry, make Level 3's "wholesale revenue growth ... unsustainable," and consequently increase "downside risk for [Level 3's] share price." But is Citi right?

Let's go to the tape
For clues to this banker's prognosticating proficiency, we turn once again to its record on CAPS, where we find that Citi does get the majority of its calls right -- 54% since we started tracking. In fact, the analyst ranks in the top decile of CAPS investors overall, helped by telecom picks such as:

Yet Citi's prescience in the field isn't without static. The company's placed some really bad calls here as well:

Perhaps the most interesting thing about Citi's downgrade of Level 3, however, was contained in the dicta appended to its opinion. Specifically, the banker suggested that although it wasn't so keen on Level 3, Citi did like Level 3 rivals Equinix and Time Warner Telecom. Yet as you can see above, Citi's results on these two stocks, as well, have been mixed.

So what's a poor Fool to make of all of this high-minded telecom ratings-assignery? I'm not a huge fan of any of the three stocks Citi discussed this morning. Not Equinix. Not TW Telecom. Definitely not Level 3. Here's why:

• Both of Citi's favorite picks, TW Telecom and Equinix, are expected to earn a profit next year. However, the high forward price-to-earnings ratios that result fail to measure up to their respective growth rates. This leaves TW Telecom with a 2.6 PEG ratio for 2009 and Equinix with a nearly as bad 1.9 ratio.
• And that's all assuming next year turns out as well as planned -- an assumption that Citi's comments now put in question. Meanwhile, neither TW Telecom nor Level 3 is currently profitable. Equinix is profitable, but only marginally so.

Foolish takeaway
I think Equinix may be the best of the three stocks. But do you really want to sink your hard-earned cash into a stock whose greatest claim to fame is that it's the best of the worst?

I didn't think so.