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 ...
DryShips (NASDAQ:DRYS) shares are floating higher this morning, buoyed by the prospects of better cash generation in years to come -- and incidentally, a brand new "buy" rating from Deutsche Securities. But does this buy rating hold water?

Let's go to the tape
At first glance, you might not think so. After all, Deutsche's record in the Marine space is pretty spotty:

Across the sector, Deutsche scores a mere 50% for accuracy on such picks, and its complete slate of Marine picks is currently underperforming the market by a combined 11 percentage points. But that's not the whole story.

Don't look up, look down
DryShips bulls can take comfort in the nuances of Deutsche's buy rating on their stock this week. Because according to Deutsche, while "[Dryships]' long-term dry bulk charter coverage" only suffices to give the stock a "stable structural backdrop," the key to this upgrade lies below the waterline. In upgrading the shares, Deutsche emphasizes the company's "intermediate-term exposure to the drillship charter environment," arguing that "these potential cash flows are undervalued by the market."

And here's the good news: When it comes to drilling for oil stocks, Deutsche is one lucky wildcatter. Although it correctly calls outperformers only 50% of the time, its few lucky strikes more than make up for its near misses, helping Deutsche's oil picks, on balance, to outperform the market by an incredible 617 points:

So yes, Virginia, there is reason to believe that Deutsche is calling this one right.

And yet ...
So why, you may wonder, do I continue to insist that Deutsche is wrong about DryShips? That the stock's a rust-bucket, and anyone who invests in the company is taking their life in their hands?

Let me count the ways. For one thing, consider what Deutsche itself is projecting for DryShips -- $1.12 in earnings this year; $1.06 next year. (Maybe I'm crazy, but aren't good stocks supposed to grow their earnings?) In fact, if you poll the dozen or so analysts who follow this company, they'll tell you they expect DryShips' profits to shrink by 46% per year, on average, over the next five years.

For another, remember how Deutsche said that while we await the emergence of DryShips' underappreciated drillship cashflows the downside risk would be limited by the flagship "long-term dry bulk charter" business? Well, as I review the firm's most recent cashflow statement, I'm noticing a pretty big hole in the hull of this argument. Over the last 12 months, DryShips has burned through more than $220 million in free cash flow -- which to my mind, does not equal a "stable structural backdrop" at all.

Foolish takeaway
When you combine the bad numbers with our continuing concerns about management integrity, I'm simply not convinced that the gains Deutsche foresees from drillship revenues suffice to float this boat.

My advice: Don't walk the plank with Deutsche. There are better ports for your portfolio.