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...
It's been a busy week for Teutonic megabanker Deutsche Securities. Yesterday, we brought you the thrilling news of Deutsche's upgrade of stricken carmaker Ford (NYSE:F). Today, we review the analyst's similar upgrade on the nation's largest electronics retailer, Best Buy (NYSE:BBY). Spoiler alert: I think Deutsche's as early on Best Buy as it was wrong on Ford.

Before I explain, let's first look at the details of yesterday's Best Buy rating. According to Deutsche: "[Best Buy] will continue to feel pressure from Wal-Mart (NYSE:WMT) in the consumer electronics space." Yet at the same time, Best Buy "should be one of the biggest beneficiaries of Circuit City's liquidation announcement," gaining "above-average share ... from [Circuit City's] closures. This should enable [Best Buy] to have relatively stable sales, as share gains offset overall weakness in end-user demand."

This rosy outlook has Deutsche upping its 2009 earnings estimate for Best Buy 2.5%, its 2010 estimate 5.4%, and its target price for the shares... 43%.

What the...?!
Yes, you read that right. Deutsche translated a couple of low-single-digit bumps in earnings expectations into a 40% hike in the shares' value. On its face, that sounds crazy. But before we jump to conclusions, let's examine Deutsche's record as tracked by CAPS. Maybe this analyst is some sort of retail genius? Could there be method to its madness?

Let's go to the tape
Things start off well. Deutsche has picked several winners in the retail space:

But it's also picked some whopping losers:

All of which reinforces the general CAPS verdict on Deutsche's skill as a stock picker: Not good. More than two years of our records show that this banker continues to guess wrong more often than right, ranking it in the bottom 20% of investors tracked by CAPS. I don't expect yesterday's upgrade of Best Buy to help Deutsche's record any.

Why not?
Well, Deutsche predicted that Circuit City's bankruptcy "should enable [Best Buy] to have relatively stable sales, as share gains offset overall weakness in end-user demand." At first glance, that seems sound reasoning. One fewer competitor should grow Best Buy's market share ... eventually. But not right away.

To the contrary, right now, Best Buy faces the prospect of competing for months against a dying rival's long, drawn-out liquidation sales. Try earning a profit selling the same goods currently going for fire-sale prices at the store next door. If that sounds like an easy job to you, you probably haven't been paying attention to Bed, Bath, and Beyond's (NASDAQ:BBBY) recent struggles to compete against a dying Linens 'N' Things. Triple-B's recent numbers prove that a competitor's demise doesn't boost sales until well after the funeral.

Foolish takeaway
Will Best Buy thrive once Circuit City's corpse has been lowered safely into the earth? I don't doubt it. Between now and then, however, Best Buy faces several months of hard slogging. There's no need for you to endure that pain.

My advice: Your Best time to Buy will be months from now, when things look bleakest, and Circuit City's fire-sales drive Best Buy's same-store sales numbers lower. There's no need to hurry and follow Deutsche's advice right now.