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 ...
The trading week launched in the green this morning, so enjoy it while it lasts -- because over at FBR Capital Markets, someone seems intent on letting the air out of the tires. While everyone else was busy clambering into the bullish bandwagon, analysts at FBR just downgraded Dow stalwart Alcoa (NYSE:AA) to sell.

Observing that Alcoa's stock has soared more than 50% off of its March lows, FBR admitted that it sees the same "green shoots" everyone else is talking about in recent "PMI, industrial productions, and durable goods orders" data.

Still, in this banker's view, the "demand upticks are not enough to offset the overhang in LME inventory. We also believe the aluminum market is structurally over supplied, as we are already seeing Chinese smelters coming back on line (1.7 million metric tonnes according to the Chinese Non-Ferrous Metal Association) amid higher prices and lower production (power) cost."

For anyone thrown by FBR's understandable fondness for abbreviations, "PMI" refers to the Chicago Purchasing Managers' Index, while "LME" refers to the London Metal Exchange. The former suggests how strong industrial demand is running, while the latter indicates how much aluminum is fetching on the open market. Long story short: FBR downgraded the stock to "underperform" ... and raised its price target to $8.50 per share.

Huh?
Yes, you read that right. FBR down-graded the stock, but up-graded its price. Pretty schizo, huh? But anyone familiar with FBR's record should not be surprised by this disconnect. Although it's true that FBR has scored some successes in the market -- its February '07 recommendation of Annaly Capital  (NYSE:NLY), for example (which soared 40% in a little over two years), or its February '08 advice to exit Fannie Mae (NYSE:FNM) before the stock cratered -- these successes are few and far between ... and nowhere rarer than in the Metals and Mining sector.

Having tracked FBR's performance in this industry for nearly three years now, we can tell you that FBR is currently batting .000 for overall performance:

Spinners aren't winners
But here's the saddest part, Fools: FBR is actually scoring 43% for accuracy in this sector. With a little more effort, it could become almost as accurate as a coin-flip in its predictions. But FBR seems intent on torpedoing its own chances by trading into and out of stocks, attempting to call tops and bottoms -- with the result that massive losses on its losers erase the few gains it makes on its winners. I mean, just look at the record of Freeport up above. Five times -- five -- this analyst has changed its mind on the stock in less than three years.

Foolish takeaway
Now let me be clear here -- I'm not saying that FBR is wrong about Alcoa. Fact is, after seeing this company burn through nearly $2 billion in free cash flow over the last 12 months, I'm not all that optimistic about Alcoa myself. Add to this the fact that the company totes an absolutely crushing debt load (almost equal to its own market cap), and I have serious doubts that a few green shoots can bear the weight. Yes, aluminum mining is a capital intensive venture, but, to me, that's a bit too close to the bone.

Still, when you get right down to it, the biggest difference between FBR and me is that I know my limitations. I know I'm not good at picking winners in commodities, so I don't even try. FBR, in contrast, tries and usually fails, at least according to our CAPS tracking.