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 ...
Deutsche Securities finally pulled its "sell" rating on Ford (NYSE:F) yesterday, upgrading the shares to "hold," and raising Lear (NYSE:LEA) and American Axle (NYSE:AXL) in tandem. But investors' reaction to the news was hardly what you'd expect. The parts makers both got a bump. But Ford dropped 2% yesterday, and another 4% today. What's up with that?

Let's start with the upgrade itself. According to Deutsche, automakers and parts companies are currently trading on their prospects for bankruptcy -- the lower the risk, the higher the stock price, and vice versa. At the risk of oversimplifying, therefore, Deutsche thinks that Ford's risks are not as high as its stock price implies. Why not?

Said Deutsche: "While we remain concerned about the magnitude of Ford's recent and prospective cash burn (we expect an $11 [billion] cash burn in 2009 prior to pension funding, and $2.6 [billion] in 2010), we continue to believe that Ford has sufficient liquidity to withstand our base case downturn assumptions." Furthermore, Deutsche believes that the company will "benefit by proxy" from U.S. government support for General Motors (NYSE:GM) and Chrysler. And perhaps more than by proxy -- if Ford needs federal cash, Deutsche expects Ford can get it.

All logical arguments with which I agree. Yet Deutsche's argument seems to pull little weight in the market.

Let's go to the tape
Perhaps the answer is as simple as this: Deutsche just isn't that great of an analyst, at least based on our tracking. Although it's booked some sizable wins on its recommendations in recent months ...

Source: Motley Fool CAPS.

... you'll notice that Deutsche has mainly been scoring winners by being more pessimistic than investors at large, rather than the converse. Generally speaking, this banker is still getting more of its picks wrong than right. According to our CAPS records, 52% of Deutsche's guesses still go awry. Its average pick underperforms the S&P 500 by about 1.5 percentage points, ranking Deutsche near the bottom of the pack of professional investors we track.

Is that fair?
Maybe not. I'm sure Deutsche tries hard to find winners for its clients. But if I might quote John Adams: "Facts are stubborn things; and whatever may be our wishes, our inclinations, or the dictates of our passion, they cannot alter the state of facts and evidence." The CAPS evidence tells us Deutsche is no more accurate than a flipped coin when it comes to picking turnarounds.

As far as its Ford rating goes, I have to say that the facts look similarly grim. Deutsche may think that Ford's cash burn-rate will improve in 2010, but getting from here to there will be quite a trick. Right now, Ford doesn't even make enough profit to cover the cost of the interest on its $157 billion in long-term debt. Thus, it must continually raid its $27.5 billion hoard of cash and short-term investments to pay the piper until it figures out a way to earn a profit.

Personally, I think the risk of bankruptcy here is all too real. Judging from investors' reaction to the upgrade yesterday (and today), a lot of people think the same.