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.

Attention, shoppers!
Don't say you weren't warned. One week ago, in the process of discussing JPMorgan Chase's downgrade of John Deere (NYSE:DE), I commented that this was only the beginning.

[I]f JPMorgan -- and the AP -- are right about trends in the ag industry, we could see lower spending at a whole host of ag-related enterprises. This trend won't stop at Deere. It will roll on to tumble PotashCorp (NYSE:POT) and Mosaic (NYSE:MOS), Caterpillar and Monsanto (NYSE:MON). ... Beware falling stock prices. There's more downgrades ahead.

That was quick
One week later, the tumblin' has begun. On Monday, JPMorgan peer Citigroup issued a couple of the first follow-on downgrades, sending both PotashCorp and Mosaic down more than a percent (and on a pretty green day for the markets in general, no less.) Why? Turns out::

• "U.S. farmers are delaying applying fertilizer to their fields during the fall harvesting season."
• With their incomes down 38% in 2009, farmers don't have as much scratch to spend on fertilizer.
• Last but not least, with the fall harvest coming "later than normal" this year, Citigroup thinks farmers here won't have as much time to apply fertilizer even if they were of a mind to buy it.

Meanwhile, on the other side of the Pacific Pond, the Chinese are "pressing for lower prices in a major contract." How low? Citigroup points to a contract that India worked out in July, which netted potash fertilizer for a 36% or so discount to spot prices at the time. It's unlikely the Chinese will want to pay more than their neighbors.

And yet ...
Strange as it may seem, investors spooked when Citi hopped off the fertilizer wagon yesterday are hopping right back on this morning. After selling off sharply yesterday, Potash and Mosaic both have jumped 3% or more so far today, retaking the ground lost yesterday, and then some. Is this that the right call to make?

I don't think so
Investors ignore the misgivings of JPMorgan and Citi at their peril. Because as good a reputation as JPMorgan sports in the ag industry, Citi's rep is even better. Focusing on the Chemicals sector to which Potash and Mosaic belong, we find Citi sitting on sizeable gains in roughly three out of every four of its active recommendations, including such ag-sensitive plays as:

And while it's true that Citi has made bad calls on both Potash and Mosaic in the past (hey, commodities investing is a tricky business), I'm convinced the banker is calling things right this time.

Why? Because the numbers just don't add up to a bull thesis for Potash and Mosaic.

Oh, both stocks look fine and cheap on the surface. Potash sells for a mere 11 P/E; Mosaic fetches only 10. But considering that neither firm is expected by analysts to grow any faster than 4% per year going forward, it seems to me likely that profits are headed down in the short term, and could flatline in the future.

Now tack on the fact that even today's profits look illusory -- in that neither Mosaic nor Potash generates free cash flow at anywhere near the rate they report net income -- and I see little reason to own either stock.

Time to chime in
But hey, maybe you disagree? If so, then here's your chance to publicly challenge Citigroup's reasoning, to put JPMorgan to shame, and tell the world why I've got this story all wrong. Click on over to Motley Fool CAPS now, and flame away:

• Post your comments on Mosaic.
• And if you've got an opinion on Potash, state your case.