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 ...
No two ways about it: Tuesday was a miserable day for the market -- and in particular, for Whole Foods Market (NASDAQ:WFMI), which lost nearly 9% in less than seven hours' trading. For this, you can blame a 180-degree pile-drive by Wall Street banker Jefferies & Co.

Reversing a bullish position it had taken up barely one month ago, the analyst turned negative on Whole Foods Tuesday. Explaining that a flagging economy "looks to be overwhelming the company's ability to drive even flat (same-store sales) in the fourth quarter and fiscal 2009," Jefferies predicted "a steep fall off in spending by Whole Foods' consumers who are under mounting pressure from declining asset prices and falling disposable income."

At the same time as it dissed Whole Foods, though, Jefferies took a bullish stance on one more purveyor of provisions: Kroger (NYSE:KR). Whereas Jefferies sees falling home values draining upscale shopping carts (and how does that work, exactly?), the analyst expects Kroger "to benefit from a pressured consumer," along with a trend among people who eat to "trade down to food at home from restaurants."

I beg to differ
But before I tear into Jefferies' analysis, let's give props where props are due. Over the two years that we've tracked this analyst's performance on CAPS, it has made some very smart calls ...

... which demonstrate some competence, at least, in the fields of retail and the supply chain feeding into the produce department both. On the other hand, though, Jefferies' record in supermarkets in particular seems spotty at best. Before turning tail and running away from Whole Foods, the analyst managed to underperform the market by three points on the pick, in just a few weeks' time. It balanced that with a three-point gain on SUPERVALU (NYSE:SVU) before losing another couple points on Safeway (NYSE:SWY) -- both of which recommendations Jefferies kept on the scorecard for all of two months.

I suppose that qualifies them as "long-term" investments in Wall Street Land. But I have to say: Such flightiness isn't doing any wonders for Jefferies' reputation in the world of CAPS. Here, we've seen the analyst take wrong turns on roughly 58% of its picks, resulting in an average two points of underperformance per pick (versus the S&P 500) -- placing Jefferies in the bottom one-fifth of CAPS investors.

Whole Foods vs. Kroger
Suffice it to say that I disagree with Jefferies' analysis of these two supermarkets' relative merits. Sure, I understand the logic -- tough times equal scrimping shoppers. But to me, it seems a little simplistic.

The way I see it, Kroger may be a good supermarket, but it's just one of many good supermarkets -- all selling the same basic foodstuffs, all eking out a living on razor-thin margins. In contrast, Whole Foods may operate on similar margins, but it enjoys enormous pricing power by virtue of offering wares you simply can't get at Kroger -- or anyone other than Whole Foods. Georgian wine, for one. Popcorn that puts Mr. Redenbacher to shame. Steaks that, my Whole Foods-shopping friends assure me, are to die for.

That's the qualitative argument. But numerically, I also find Whole Foods superior to Kroger, earning a slightly higher profit margin on its business, selling for a slightly lower P/E, and offering both debt-to-equity and price-to-book value ratios that are just a fraction of Kroger's.

Foolish takeaway
Sometimes, a really bad analyst makes a buy-sell argument that seems illogical on its face. When that happens, don't overthink the situation. Go with your gut, and bet that the analyst who's usually wrong will continue to be so. Put more succinctly: Buy Whole Foods and sell Kroger.