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 ...
Like teens experiencing their first high-school crush, there's nothing as cute as bankers in love -- the latest instance of which was published in the "Commitments" section of yesterday's edition of Briefing.com. There we learn that the dashing European prince of investment banking, Credit Suisse, has proposed to American girl-next-door Bank of America (NYSE:BAC), upgrading its rating to "outperform."

Why should we care? Why did ABC revive The Bachelorette? I guess Americans just like a good love story. And few investors have proven themselves as adept as Credit Suisse at discovering ugly duckling-banks with significant swan potential:

And while it's true that CS goes on the odd bad date (notable losers include its ill-fated endorsements of Wells Fargo (NYSE:WFC) and SunTrust (NYSE:STI)), the fact remains that more than twice as many of CS's active banking picks are outperforming the market, as underperforming it. So I submit to you that, when CS tells us Bank of America is a $21 stock only temporarily decked out in $17 drag, we should all be curious as to why.

This baby's got BAC (or does it?)
Credit Suisse pleads its troth to Bank of America in several stanzas this week. For one thing, repayment of the government's TARP money removes a "significant overhang" on its shares. Now that B of A's done its dilutive offering, we know how much the damage will be -- and can hope there's no second shoe waiting to drop.

For another, CS sees the risk of "severe 'too big to fail' capital rules" diminishing over time as banks rebuild their loan-loss reserves. (Incidentally, CS sees this as good reason to own two other banks, citing Fifth Third and JPMorgan Chase (NYSE:JPM) as among its favorites).

Last but not least, at some point, those loan-loss reserves should be big enough that Bank of America can start scaling them back -- allowing reported GAAP profits to surge. CS predicts this will become "a big driver of EPS growth in 2011/2012" for many banks in general.

How much growth?
Excellent question. According to CS, Bank of America's "normalized" earnings should eventually return to something like $2.65 a share -- meaning the stock currently trades for less than seven times what CS expects it to soon begin earning. And this, Fools, is where I believe CS has succumbed to banker-love, rendered blind to the unattractive valuation of this stock.

Sure, "normalized" earnings of $2.65 per share sounds good. But when exactly are we going to see this rose-colored normality? Because as of today, B of A has earned a mere $0.19 per share over the past 12 months. Most analysts expect it will earn just $0.84 next year (and actually take another bath this year, wiping out the profits earned so far, and ending 2009 with a loss).

What's more, even if we take CS's prediction at face value, and assume that in some magical, unicorn-populated utopia on the other end of a multiyear rainbow, B of A does begin earning $2.65 per share, I ask you: Is a 7seven times earnings multiple really that great a bargain when most analysts think the bank's five-year growth rate will average just 6%?

Foolish takeaway
I'm not disputing that love conquers all, Fools, only that valuation matters far more -- at least when it comes to investing. And from where I sit here on the judges' panel, it seems pretty clear: Bank of America is no swan-about-to-soar-on-revived profits. This stock walks, talks, quacks -- and is -- a duck.

And not a particularly attractive one.