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 ...
What a difference an analyst makes. Two weeks ago, we watched in wonder as an upgrade on MasterCard (NYSE:MA) from Susquehanna Financial had zero effect on the stock's price. Today, we see the same kind of upgrade (a tick up to "outperform") send both MasterCard and archrival Visa (NYSE:V) up sharply ahead of the market.

What's changed in two weeks? The name of the analyst doing the upgrade: Credit Suisse.

In contrast to Susquehanna's less-than-stellar reputation, Credit Suisse is a stockpicking star, rated in the top 10% of investors we track. Problem is... I'm not certain it deserves all the credit it's being given -- at least not in credit cards. Consider the analyst's record in the global payments processing industry:

Two-for-three -- hardly encouraging. And now check out its record on banking in general:

Not really any better here, either. In fact, Credit Suisse gets about 52% of its guesses right in the banking sector. But again, it's hardly the kind of superstar record you'd expect of a banker ranked in "the top 10%."

The reason being: Credit Suisse's reputation relies not so much on its record as a boffo banking analyst, as on its success picking winners in other areas of the market. Shipping, for example, where Credit Suisse has racked up big points plotting the fortunes of such firms as DryShips (NASDAQ:DRYS) and Genco Shipping.

The argument
So when Credit Suisse tells us that it expects a "secular shift from cash to plastic" to help MasterCard and Visa "grow several percentage points per year faster than global gross domestic product," I think you need to take the prediction with a few grains of salt -- its reputation just doesn't merit blind faith in the face of contrary facts.

Consider first the unemployment rate. With nearly 10% of the U.S. workforce cooling its heels, it doesn't matter much whether consumers line their wallets with cash or plastic. If there's no paychecks coming in to keep the wallets stuffed, there's won't be a lot of spending going on.

Consider too that banks are cutting back on extension of credit. Credit Suisse itself acknowledges that "this decline could continue into 2010" (but believes that increased use of debit cards will pick up the slack.) And maybe the banker's right about that one. I personally cannot remember the last time I used a debit card (there's just no cents in it), but I understand that some people like the feeling of knowing they are limited in how much a debit card will allow them to spend.

Foolish takeaway
In any case, Credit Suisse's view appears to be the popular view on Wall Street, where most analysts predict that both MasterCard and Visa will post double-digit profit growth over the next five years -- nearly 18% for MasterCard, and more than 19% for Visa. It sounds impressive, but given that both stocks are now trading at trailing P/Es of nearly 40, I don't believe the valuations are justified even if these phenomenal growth predictions pan out.

And if they don't? If fiscal reality sets in, and Credit Suisse's predictions of milk 'n' honey for the credit card hawkers fail to appear? Look out below.