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 Goldman Sachs (NYSE:GS) weighed in on (what it thought were) the brightest lights in the American steel sector, I admit I scoffed. But this week, we've got yet another of the supposed best investors on the planet upgrading Big Steel. Is it time for a rethink? Could steel be ready to shine?

This is the question we face today, while reviewing a pair of new steel ratings just released by Teutonic megabanker Deutsche Securities. As the trading week heated back up on Tuesday, Deutsche tossed one iron into the fire, upgrading U.S. Steel (NYSE:X) to "buy," even as it downgraded smaller rival AK Steel to "hold."

Deutsche said: "Steel prices are again rising ... We believe these recent gains are broadly supported by economic growth, restocking and sector costs. ... Stock performance has been strong but we still see expectations as low and upside in the group under our forecasts." (And indeed, while you might think the AK downgrade would negate the optimism inherent in the USX upgrade, this may be a simple case of Deutsche "taking profits" -- its previous buy rating on AK has outperformed the broader S&P 500 performance by 11 percentage points over just three months' time.)

Even if Deutsche is generally optimistic across the steel sector, is that any reason for us to follow its lead?

Let's go to the tape
At first glance, you might think so. After all, Deutsche is well-regarded as one of the best stockpickers on the planet, outperforming nearly 90% of the investors we track on CAPS. And within the metals & mining sector in particular, it's made some very smart picks:

That said, Deutsche has also bungled several calls in this steel sphere:

And while investors may feel heartened by the banker's recent success on its AK Steel pick, it's worth pointing out that the last time Deutsche told people to buy U.S. Steel, the stock wound up underperforming the S&P by a whopping 22 percentage points.

Steel vs. pig iron
Now, that doesn't mean Deutsche is wrong this time. Anyone can have a bad day, and just because Deutsche bungled the ball back in October 2007 doesn't mean it will be proven wrong again with this latest endorsement of U.S. Steel. 

That said, I think it will.

My reasons are basically unchanged from what I wrote earlier this month. In addition to suffering from an income statement entirely devoid of profits, U.S. Steel also possesses:

1. One of the scarier balance sheets in the industry.
2. A cash-burning cash flow statement.
3. A share price that's more than 50 times what analysts expect it to earn next year.

Those three reasons explain why I'm not exactly jumping up and down with excitement over the opportunity to follow Deutsche over a cliff by buying this overpriced stock.

Foolish takeaway
Of course, since I publicly panned U.S. Steel earlier this month, the stock has taken a perverse turn for the better, rushing ahead 7.4% on the strength of multiple analyst upgrades -- while the S&P 500 sat basically flat. Maybe that means I'm wrong, and that Goldman, Deutsche, and all the bankers lining up behind them are right.

But I don't think so.

What do you think about U.S. Steel's chances? Click over to Motley Fool CAPS now, and make your voice heard!