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 ...
Attention, Potash (NYSE:POT) and Mosaic (NYSE:MOS) shareholders! I've got good news and bad news for you today. Good news first, you say? No problem. Somebody over on Wall Street just initiated coverage on the fertilizer industry, and you're in luck -- both Potash and Mosaic got started with an "overweight" rating. Seems fertilizer demand has hit a cyclical low point, and is bound to rise soon. When it does, your shares will rise too -- perhaps as high as $58 a share for Mosaic, and $110 a share for Potash.

Investors hearing the news promptly bid up the whole fertilizer sector, with Agrium (NYSE:AGU), China Green Agriculture (AMEX:CGA), and Intrepid Potash (NYSE:IPI) all rising alongside the two flagship names. Oh, but then there's the bad news: The analyst recommending the shares is Thomas Weisel.

Let's go to the tape
If the name doesn't ring a bell, then you probably don't invest a lot in financial services stocks. This is where Thomas Weisel has enjoyed much of its success in recent years:

Problem is, this is one of the few areas where Thomas Weisel has rewarded investors. More often than not, the analyst guesses wrong on its recommendations, getting just 46% of its picks right -- and underperforming more than 80% of the investors we track on CAPS.

I very much fear that's where this week's fertilizer recommendations are heading as well. Consider: Right now, neither Potash nor Mosaic looks particularly pricey from a straight P/E point of view. The former fetches 11.6 times trailing earnings; the latter, just 10.3. Cheap, right?

Not so fast
Not necessarily. "Cheap" is a relative term, and in this case, even the fertilizer twins' sub-market P/Es don't look low enough relative to their growth prospects. On the whole, Wall Street doesn't expect either Potash or Mosaic to grow their profits faster than 4% per year over the next five years -- barely enough to keep pace with inflation. Nor can you count on a dividend to supplement the firms' limited growth potential. Both Potash and Mosaic offer just a meager 0.4% payout. But it gets worse.

Valued on their free cash flow, these firms look even more expensive. Neither Potash nor Mosaic generates cash at anywhere near the rate they report net income. In fact, Mosaic's $2.4 billion in "accounting profits" are currently backed up by barely $460 million in actual free cash flow. And while Potash reports higher profits, it's net income-to-free cash flow relationship is in even worse shape -- $2.5 billion in net income, versus just $181 million in actual free cash flow. Ugh.

Final point: Despite recommending buying both stocks, Weisel's not promising a whole lot of upside to either Mosaic or Potash. Weisel suggests patient Potash owners will get $110 a share in 12 months' time -- so a 15% profit. Meanwhile, the $58 price target Weisel slapped on Mosaic suggests only 6% upside.

Foolish takeaway
Weisel's a pretty good analyst when it comes to financial services stocks -- but it should stick to its knitting in that sector. Overpriced, under-dividend-ed, and with limited growth prospects, neither Potash nor Mosaic deserves a "buy" rating today. And anyone following Weisel's advice is cruising for a portfolio bruising.