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.

And speaking of the best ...
By any measure, JPMorgan Chase is far from "the best" stock picker on Wall Street these days. The banker gets only 48% of its stock recommendations right, and outperforms barely 78% of the investors we track in CAPS -- precious few of whom own their own investment banks, I might add. Personally, I suspect JPMorgan's floating on its reputation as one of the few survivors of the banking fiasco ... but its recent recommendation to sell Plum Creek Timber (NYSE:PCL) deserves attention regardless.

I'll bite. Why?
Quite simply, because within any organization as large as JPMorgan, there are good analysts and bad analysts. At JPMorgan, it's the financial analysts who have been dropping the ball lately, racking up big losses to the market on stocks like these:

JPMorgan may flounder in the banking sector, but when it comes to picking companies whose fortunes are tied to construction, JPMorgan swims like a champ. As of today, the banker is scoring perfect 100% records on its active picks in the Construction Engineering, Construction Materials, and Building Products segments. Don't just take my word for it. See for yourself:

Taking the axe to Plum Creek Timber ...
Yesterday, JPMorgan advised investors to sell yet another company whose shares are tied to the fortunes of the construction sector. According to the JPMorgan analyst, the timber industry in general needs "more permanent capacity withdrawal," while Plum Creek's valuation in particular is "stretched."

The analyst points out that Plum Creek's shares are fetching twice the enterprise value-to-free cash flow ratio of Rayonier. Considering that Rayonier carries considerably less debt than Plum Creek, yet pays out almost the same dividend yield (a key number when you're investing in timber REITs), I can see JPMorgan's point -- if Rayonier's got a better balance sheet than Plum Creek, and sends out a similarly fat dividend check quarter after quarter, then there seems little logic in paying twice the price for the same income stream.

... and planting a seed of dissent
That said, it's worth pointing out that JPMorgan's concerns echo worries recently voiced in Barron's -- worries that the Fool's own Todd Wenning addressed at length in his column, "Is Barron's Roundtable Wrong on Plum Creek?"

You can read the whole debate by clicking on that link above, but I think the key takeaway is that Plum Creek is a tricky beast to value. It's actually two kinds of companies, rolled up into one:

• A company that grows, harvests, and sells timber to construction companies -- a stable and, to my mind, very attractive business in that it enables Plum Creek to cut and sell trees when the price of lumber is high, or just let the things grow and get bigger all on their own when lumber prices fall.
• And also a land concern, which does the same kind of thing with real estate -- buying land when prices are low (like today) and unloading it on developers whenever there's a housing boom.

The very nature of the business model, therefore, dictates that Plum Creek will sometimes have very high earnings and cash flows as it liquidates timber and land inventories in a seller's market, and very low earnings and cash flows when buyers are scarce.

Foolish takeaway
None of this changes JPMorgan's criticism of Plum Creek as being too expensive relative to Rayonier, of course. But it does remind us: Even if you think that stocks look pricey today, that doesn't mean they won't turn out to (have been) exceedingly cheap once the housing market turns.