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 ...
Yesterday we examined Goldman Sachs' (NYSE:GS) downgrade of Boeing (NYSE:BA) and found it wanting. Primarily, it was the analysts' failure to recognize "capitulation" in the aerospace industry which earned my ridicule. But also important was the lack of any CAPS-tracked public record of success at Goldman.
The analyst does not report its ratings to anyone I know of that compiles ratings, so investors like you and I are unable to track how well these ratings "worked out" over time. With Goldman thus unaccountable for its actions, we couldn't give its arguments much credit even if they had deserved it. (Which I still insist they did not.)
Not so with UBS. This morning, hard on the heels of Goldman's Boeing downgrade, the Swiss banker aimed a volley of downgrades at Boeing suppliers:
- Spirit Aerosystems (NYSE:SPR)
- Precision Castparts (NYSE:PCP)
- Hexcel
- Triumph Group
The proof in UBS' pudding
UBS, as you may know, is a special case in the analyst world. The banker rarely makes the reasons for its ratings public -- but that's OK (albeit frustrating for investors). We may not know why UBS assigns the ratings it does, but because the banker makes its ratings public, we at least know how well those ratings have worked out historically.
And that is ... ?
Um, not great. Over the two-plus years that we've been monitoring UBS' work via Motley Fool CAPS, we've pegged the analyst as at best a mediocre stock picker. Despite boasting several big winners such as PotashCorp (NYSE:POT), which is up 61% since UBS picked it, multiple losers like U.S. Steel (NYSE:X) and Cummins (NYSE:CMI) -- both lagging the market by more than 70 points -- have dragged UBS' average down to the point where its average pick underperforms the S&P 500 by the tiniest of fractions.
Think of UBS, therefore, as a way to spend time, effort, and money in a losing race to tie the S&P.
Foolish takeaway
Fortunately, you don't have to pay cash money to a name-brand analyst for the privilege of lagging the market. With a little fifth-grade math, I think you can equal or better UBS' performance on your own.
Right now, Precision Castparts is selling for a tiny price-to-earnings ratio (P/E) of eight, despite most analysts agreeing that the company will probably grow its "E" at better than 17% per year over the next half-decade. Likewise, Triumph and Spirit sell for single-digit P/Es versus double-digit growth rates. And Hexcel? It may have the highest P/E of the bunch, but at 12 it is hardly stratospheric, whereas its 22% projected growth rate could easily make the stock shoot to the moon.
By any measure, the aerospace industry is looking awfully cheap right now. Maybe the Street gang is scared to buy right now, but what is it that Warren Buffett always says?
When Wall Street is fearful, that's exactly the right time for you to get greedy, and snap up some bargains.
