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 track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

Welcome to the party, JP
It was a long time coming, but then, JPMorgan Chase has never been the quickest draw in the West. More than a month after I first explained how investors could profit from a bankrupt GM by investing in Magna International (NYSE:MGA), the banker has finally agreed and upgraded shares of the Canadian auto parts maker yesterday morning.

Now, you've all had a good month to examine the call, and determine whether buying Magna was worth it. (Hint: So far, it has been. Magna shares are up 4.5% since I wrote that article, versus just 0.9% for the S&P 500.) But what about JPMorgan? Does the fact that the banker's now on board confirm the idea that Magna is worth owning, or is it a contrarian indicator -- a flashing warning light on the dashboard, that reads …

"Danger! Exit the vehicle immediately!"
Forgive the hyperbole, but I have to say that, as tracked in CAPS, JPMorgan's record in the automotive sector leaves quite a bit to be desired. Although it's true that this banker has scored some remarkable successes ...

... its record in the automotive sector looks considerably more hit-or-miss. Reviewing the banker's currently active recommendations in auto parts, we find:

Of the seven active calls in Auto Components, only two are beating the market right now (Goodyear and Cooper). And on the one pick you really want to know about? GM? Just as I feared, JPMorgan was on the wrong side of this trade as well. As the Detroit kingpin plunged into bankruptcy, JPMorgan still had an outperform call on the stock. Total loss to-date: 56 points of market underperformance.

So, where does that leave us?
Having recommended Magna previously myself, I'd love to be able to tell you that I'm heartened by JPMorgan's sticking out its thumb and hitching a ride this week. Problem is, I'm not.

You see, when I look at Magna, I see a company with strong historic free cash flow generation, which remains cash-profitable even in the depths of the recession. I see an auto sector enterprise that's debt-free and cash-strong, where so many of its rivals are neither. To the extent that JP sees the same thing, I'm in agreement with the banker that this is one of the best companies in the sector.

That said, the more I look at how Magna handled its opportunity to control Opel -- the more I think this firm missed a chance to become really great. Agreeing to take only a 20% stake in the GM subsidiary, and giving the Russians 35%, Magna now plays a bigger role in the automotive industry -- but it's not yet a player. Crunching the numbers on the purchase price, it seems to me that all of Opel was valued at something under $1.4 billion. Magna, however, is putting up only a fraction of this sum as its investment, despite the fact that Magna has more than $1.7 billion in cash in the bank.

Seems to me, Magna had a chance to buy Opel whole, without taking on minority partners, and become a full-scale automaker in its own right. Given the chance, Magna ... passed.

Foolish takeaway
Such timidity does not behoove a long-term winner, Fools. Magna had a chance to grab the bull by the horns and transform itself into a real player on the world automotive stage. Yet minutes from winning the game, Magna choked. It caved.

In the final analysis, superb free cash flow and a debt-free balance sheet remain strong points in Magna's favor. But for me, they're no longer enough. And JPMorgan's endorsement? That was the final straw. Turns out, Magna isn't so magnificent after all.