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 ...
When Buffett announced earlier this month that his Berkshire Hathaway (NYSE:BRK-B) investment vehicle was going "all-aboard" Burlington Northern (NYSE:BNI), it became open season on railway stocks in America. Acting like a bunch of kids at a Pinewood Derby -- but with boxcars instead of pine boxes -- investors pushed hard and piled aboard Union Pacific (NYSE:UNP), CSX (NYSE:CSX), Norfolk Southern (NYSE:NSC), you name it.

Result: Runaway train stocks. According to a downgrade just out of UBS, railroads have "outperformed the S&P 500 by 10%" since Buffett's Nov. 3 announcement, and within the industry, Union Pacific "has the most to lose if this bubble unwinds."

Why? As UBS points out, this is the third time that "Buffett investments in this industry" have led to a surge in stock prices elsewhere in the sector, in both of the previous times, "the stocks quickly gave back half of those relative gains."

Will history repeat itself?
Railroad bulls are certainly free to hope for a different outcome this time around -- but they shouldn't bet the house on it, because as UBS's record demonstrates, this analyst is far more likely right than wrong in its prediction. Within the Road and Rail industry, few analysts boast a record better than UBS's:

Overall, UBS scores a staggering 73% record for accuracy in the road and rail segment, a number almost unheard of on Wall Street. But the truth is, you don't even need to be the kind of genius rail-rider that UBS is to make this call.

Valuation -- it still matters
Paying a modest dividend, with a 16 P/E and growth projected at 13% over the next five years, Union Pacific isn't your typical high-flyer. To the contrary, on the surface this stock actually looks pretty attractively priced. It sells for a lower P/E than Burlington Northern, sports a faster growth rate than Norfolk Southern, and beats CSX on both.

And yet, while Union Pacific may be the relative "best pick" in this industry, the railroad industry as a whole just ... plain ... stinks!

As I argued back in August, anywhere you look in the railroad industry, you find "massive debt loads relative to equity" and "free cash flow that lags reported net income." Reviewing all of the biggest names in rail, I concluded: "literally nothing attracts me here."

But what about Buffett?
Yes, what about Warren Buffett? He bought Burlington Northern, and before that, he was an active buyer of other railroad stocks. So what does the Oracle of Omaha himself have to say about the valuations?

"The company wasn't egregiously cheap."

"You don't get bargains on things like that. It's not cheap."

"It could be five years before the logic [of the Burlington Northern purchase] becomes clear."

Foolish takeaway
OK, so why is Buffett buying Burlington today? Personally, I think he's doing it as a form of retirement planning. Knowing his own days are numbered, and having his investors' best interests at heart, Mr. Buffett is in the process of positioning Berkshire Hathaway so that, upon his eventual retirement, "any monkey" can run the company in his absence. I mean, look at what he's been buying lately: railroads and utilities. And of course, the core of the business remains that staidest of staid industries: insurance. These are companies that can survive in business for years, decades, centuries.

But will they outperform the market? I highly doubt they will.

And that, Fools, is why you should follow UBS's advice and debark from Union Pacific today.

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