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This Just In: Upgrades and Downgrades

By Rich Smith - Updated Apr 5, 2017 at 7:57PM

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Deutsche looks at Nucor; exclaims: "Shiny!"

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 ...
Deutsche Securities started off the week on an up note ... and a down note on Monday. Taking a good, hard look at the global steel industry, the Teutonic megabanker gave its blessing to U.S. mill operator Nucor (NYSE:NUE), even as it withdrew its approval of U.S. Steel (NYSE:X). The former received an upgrade to "buy," while the latter lost its "buy" rating, and slipped a notch to "hold."

After careful consideration, Deutsche decided it's been too optimistic up till now, and the time has come to reduce earnings forecasts for the coming year. No quick trim, this is a full-scale haircut -- a 44% reduction necessitated by "lower volume and steel price assumptions for all coverage companies" in the new year.

Changing focus
With profits under pressure, Deutsche Securities tells us that balance sheets will gain importance in the coming year. The earnings game will become less the race for fabulous profits of yesteryear, and more a contest for who can make enough money to simply service its debt. In this regard, Deutsche commended both "Nucor and AK Steel (NYSE:AKS) as having the strongest balance sheets in the industry and ArcelorMittal (NYSE:MT) and Ternium as having the weakest."

Which, I have to admit, makes some sense. Reviewing the five named firms' financials, Nucor and AK Steel have the lowest debt-to-equity ratios of the bunch (0.42 and 0.46, respectively). They also have the strongest interest coverage ratios, with Nucor in particular earning 31 times more earnings before interest and taxes than it needs to keep up with its debt payments.

Caveat investor
But note that I said "some sense." What Deutsche doesn't say is that in both respects -- debt-to-equity and interest coverage -- scorned U.S. Steel scores nearly as well as its esteemed rivals Nucor and AK Steel -- at 0.52 times and 16.7 times, respectively. Nor will you read in Deutsche's report any mention of the banker's record in this industry.

The fact is that Deutsche's January recommendation to buy ArcelorMittal (since rescinded) underperformed the market by 18 points before getting pulled, and that a similarly bullish stance on Russia's Mechel (NYSE:MTL) is now losing to the market by a good 54 points. Bad calls like these are currently helping keep Deutsche tied to the 20th percentile of investors tracked by CAPS, making this banker one of the worst in the world.

Foolish takeaway -- and a bonus
Personally, I'm not impressed with Deutsche Bank's record. Certainly not enough to flee U.S. Steel on its say-so, and probably not enough to buy Nucor or AK Steel without taking a much closer look at the companies first.

That said, if you do want to listen to it -- and remember that there is at least a kernel of wisdom contained in today's ratings -- then here's another nugget that may prove useful: Cognizant of the laws of supply and demand, Deutsche Bank sees slack steel demand pulling down input prices this year. Specifically, the banker predicts as much as a 40% drop in iron ore prices in 2009, with coal prices dropping perhaps 60%. So if you own BHP Billiton (NYSE:BHP) or Rio Tinto (NYSE:RTP), for example, you might want to keep an eye on steel over the next few months. If Deutsche Bank's right about steel, its predictions there might affect your own fortunes as well.

Just a few words to the Foolish.

On Jan. 12, 2009, Fool co-founder David Gardner, Jeff Fischer, and their Motley Fool Pro team will accept new subscribers to their real-money portfolio service. Motley Fool Pro is investing $1 million of the Fool’s own money in long and short positions in a range of securities, including common stocks, put and call options, and exchange-traded funds (ETFs). They also incorporate proprietary CAPS "community intelligence" data into their research. To learn more about Motley Fool Pro and to receive a private invitation to join, simply enter your email address in the box below.

Fool contributor Rich Smith does not own shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 835 out of more than 125,000 members. The Fool has a disclosure policy.

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Stocks Mentioned

Nucor Corporation Stock Quote
Nucor Corporation
$141.87 (-0.71%) $-1.02
BHP Group Stock Quote
BHP Group
$54.74 (-1.83%) $-1.02
United States Steel Corporation Stock Quote
United States Steel Corporation
$24.41 (-3.33%) $0.84
AK Steel Holding Corporation Stock Quote
AK Steel Holding Corporation
ArcelorMittal Stock Quote
$24.65 (-2.95%) $0.75
Mechel PAO Stock Quote
Mechel PAO
$2.25 (-2.17%) $0.05

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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