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 ...
Industrial heavyweight Caterpillar (NYSE:CAT) set Wall Street purring with its earnings report yesterday -- but not everyone's convinced.

Goldman Sachs (NYSE:GS) upgraded the shares and upped its earnings guesses for the company, saying Cat's results portend: "a sharper construction recovery and CAT's cost control has clearly improved, benefiting from aggressive 1Q actions." Yet somehow, rival analyst Stifel Nicolaus looked at the same numbers that Goldman crunched, and came to the opposite conclusion: Cat is a dog. You should sell it.

So who's the savvier equity-veterinarian in this debate?

Let's go to the tape
As I've mentioned several times in the past, Goldman's a puzzler -- and famously disdainful of backseat drivers. The megabanker moved quickly to pay back a government loan (that it never wanted in the first place) earlier this year. In a similar vein, Goldman quickly found that publishing its stock ratings via Briefing.com subjected it to unwanted accountability for its opinions. So while the odd rating (such as Caterpillar) will occasionally slip out in the mainstream press, Goldman hasn't published its ratings as a matter of course since 2007.

Not so with Stifel, which assiduously posts its opinions on Briefing.com -- and for good reason. Three years of tracking this analyst's performance on Motley Fool CAPS has proven that when it comes to picking winning stocks, Stifel is one of the best in the business.

Famed for its successful (and long-term) picks in the energy sector -- the firm's October 2007 recommendation of Massey Energy (NYSE:MEE) has gained 41%, while its 2006 endorsement of National Oilwell Varco (NYSE:NOV) has nearly doubled the market's returns -- Stifel's also no slouch when it comes to the companies whose products do much of the work getting coal and oil sands out of the ground, and into your gas tank:

So what we have here, folks, is the unknown (but reputed to be good) quantity of Goldman Sachs, matched up to the known quantity of Stifel's expertise. Right from the start, Stifel's superior disclosure makes me more inclined to trust its "sell" rating on Caterpillar over Goldman's more muted "neutral" assessment.

Do you partake of Cat-nip?
But what has these analysts at loggerheads over the company? I suspect The Wall Street Journal framed the dispute best on Tuesday, when it noted a certain disconnect in expectations for Caterpillar.

In a nutshell, Caterpillar is telling investors that the recession's end will come sooner and more vigorously than a lot of us think possible. Whereas most Wall Street analysts believe that strong and steady, 11% five-year growth at the company will yield $2.46 per share in earnings next year, and perhaps $4.55 per share by 2012, Caterpillar itself insists that three years from today, we'll be looking at an incredible $8 to $10 per share in profit. The implied valuation of roughly six times 2012 earnings (as opposed to what we see today: 20 times trailing earnings) would therefore seem attractive.

Personally, I don't buy it. And judging from its downgrade, Stifel is also hacking up this hairball. (Even Goldman, despite upgrading the shares, predicts only $2.40 per share in 2010, and $3.90 in 2011 -- in which case, getting to $8 by 2012 looks like a stretch.)

Foolish final thought
Now, it's entirely possible that I'm wrong about Caterpillar, and that Stifel's wrong to downgrade it. It's totally possible that Goldman's too conservative in its near-term estimates. Perhaps Caterpillar knows exactly what it's talking about. In three years' time, perhaps it will earn twice what everybody thinks it can earn. Perhaps its shares are massively undervalued today. But if that's the case, I have to wonder why, over the last six months, Caterpillar insiders have been net sellers of the stock.

Looks like they may be the only party in this debate that hasn't been sniffing the catnip.