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 worst ...
America's leading parcel packers got themselves a couple of much-needed upgrades yesterday, as first JPMorgan Chase and then Jesup & Lamont issued twin upgrades to FedEx (NYSE:FDX) and UPS (NYSE:UPS), respectively. Should you heed their advice to buy these stocks?

Depends. If you absolutely, positively, have to lose money on your investments overnight ... then yes, I'd suggest you follow their advice. If, however, you'd prefer to make a profit, I'd urge you to keep as far away from these stocks as possible.

Why so down on UPS?
In today's column, I'm going to focus on the Jesup & Lamont (J&L) upgrade for two reasons:

In the spirit of full disclosure, the first reason I'm picking on J&L is because it's easier. JPMorgan may not be a very bright banker, but next to J&L it looks like a relative star. JP gets 49% -- or nearly half -- of its stock picks right according to our tracking in CAPS, including near- and actual two-baggers on these recommendations:

In contrast, J&L has only a 43% record for accuracy on its recommendations. And since we're talking about airborne freight haulers today, I think it's particularly telling to point out J&L's performance in the airborne people-hauling industry, where recommendations such as these ...

... have all gone badly awry, with disastrous consequences for investors who followed J&L's advice. True, J&L is outperforming the market on its FedEx rec so far, but by only 13 points.

And the other reason?
The other reason I want to focus on J&L is that there's simply more detail to work with. Whereas MarketWatch basically characterized JP's upgrade as a bet that "gradual improvement in transport demand data points" will create "upside" for FedEx, we know quite a bit more about J&L's reasons for upgrading UPS.

To wit, J&L tells us that it expects the U.S. economy to recover in 2009's fourth quarter or the first quarter of 2010. Once that happens, UPS "shares will move higher" as "longer term, UPS can grow at least in line with GDP, and more likely faster." Assigning to the shares a fair value of 20 times forward earnings, J&L tells us to expect to see "at least $57 per share" pricing on UPS.

Hmm ...
UPS will grow "more likely faster" than GDP, you say? I would certainly hope so. According to economist Robert Shiller, GDP growth post-recession is likely to track a "new normal" rate of 2% per year -- or less.

Granted, if we tack on 3% or so for inflation, and -- let's go crazy here -- maybe another 5% for annual price hikes (hey -- they got away with it last time), we can conceivably boost UPS's prospective profits growth rate up to 10%. (Which is, in fact, a bit ahead of the Wall Street consensus on the stock.)

Valuation matters
Even under this optimistic scenario, however, we would still be looking at a UPS valued at 20 times forward earnings and only 10% growth -- which, unless my calculator deceives me, works out to a 2.0 PEG ratio, or about twice what any value investor would tell you is a "good price."

Foolish takeaway
While it's in J&L's nature to make bad calls -- as confirmed by the analyst's track record on CAPS -- this one is ridiculous to me. I mean, no less a sage than Warren Buffett just finished telling the world that he sees no evidence of the "green shoots" everyone keeps talking about. Yet J&L's buy thesis seems to grow straight out of these shoots -- and the reviving economy they supposedly portend.

Moreover, even if you take J&L's word over Buffett's, and even if you assume a more profitable future for UPS than most of Wall Street is projecting ... the stock still looks overpriced. (Don't cackle, FedEx. You've got your own issues.)

J&L may see all of this as adding up to a buy thesis. I do not.