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 best ...
Who knows securities markets better than a securities market-eer? That's the vital question when evaluating the latest ratings on CME Group (NYSE:CME), NYSE Euronext (NYSE:NYX), and Nasdaq OMX (NASDAQ:NDAQ). Up on Wall Street, All-Star stock picker Pali Research initiated coverage yesterday ... and panned all of 'em.

Regarding CME, which operates the Chicago Mercantile Exchange, Pali sees: "Continued weakness in open interest levels (down 34% YOY in March...) has left us cautious on the near-term outlook for trading volumes at CME. Moreover, given the strong relationship ... between trading volumes and economic activity, we have a hard time seeing what the near-term catalyst to boost volumes will be given a cautious view on the economy." And yet, as Pali points out, the stock price on CME "has surged 43% in the last four weeks," leading the analyst to conclude that "current valuations appear inflated."

Moving from commodities to strictly defined equities, Pali sees both these and other issues plaguing the Nasdaq and NYSE. In addition to lower value traded on both exchanges (Pali estimates a 55% drop in value traded in Europe for Nasdaq OMX for the current quarter), the two rivals are fighting a price war that has cost each dearly in terms of revenue. The analyst predicts that we will see trading continue to dwindle "across most asset classes" as the year progresses. Meanwhile, a dearth of IPOs means that neither the Nasdaq nor the NYSE can hope for much additional income from new listings.

Bad news all around
When Pali speaks, investors should listen -- however painful that might be.

According to our records on CAPS, Pali currently ranks as one of the better investors on Wall Street. This banker beats almost 90% of the investors tracked on CAPS, gets more than 55% of its picks correct, and outperforms the S&P 500 by a solid four points per pick on average. Pali doesn't make as many stock recommendations as some of its bigger brethren -- but it makes up in quality what it lacks in quantity:

Now, nobody's perfect. As you can tell from the firm's 55% accuracy rating, Pali still gets a lot of picks wrong, too:

But overall, Pali's doing pretty well with its picks -- and I expect it will do even better as its sell ratings on the CME, NYSE, and Nasdaq exchanges bear their bitter fruit. Simply put, their prices are too high.

Right now, the cheapest of these stocks is Nasdaq, which pulled $353 million in trailing free cash flow (FCF), and features an enterprise value of about 15.5 times its annual free cash flow. NYSE comes next, at 17.5 times FCF, and CME brings up the rear at an 18.5 multiple. None of these stocks looks cheap when you figure that analysts are predicting between 11% and 15% annual five-year earnings growth for the various marketplace businesses.

Foolish takeaway
While Nasdaq OMX sells for the closest thing to a fair valuation today, both NYSE and CME are a long way from that target. They're significantly overvalued, and ripe to sell. Thus, Pali's advice to take profits from their recent run-ups, and wait for better prices before buying back in, looks sound to me.

The time will come when each of these natural monopolies sells for a price worth owning. That time isn't now.