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 ...
Yesterday was a miserable day to be an investor -- for most investors. Yet even as the stock market tripped, skinned its collective knee, and bled red over many portfolios, shareholders of Archer Daniels Midland (NYSE:ADM) found themselves sitting pretty-in-the-green. For this, you can thank the friendly bankers at Citigroup (NYSE:C).

Yes, Citigroup. Although ill-abused by investors after reporting miserable earnings news in its own right Tuesday, the megabanker turned the other cheek and gave a gift to ADM shareholders, at least, upgrading the shares to buy and calling ADM its "top pick in our coverage universe." Says Citi, "accelerating trends [are] unfolding in ADM's major businesses," where both oilseed processing and ethanol look particularly attractive. When combined with "street EPS estimates which appear too low," Citi thinks this has every chance of creating "very good upside" for the shares, which Citi thinks could hit $37 within the year.

Seriously?
Yes, seriously. And you know what? Citi just might be right on this one. Consider: The same "street EPS estimates" that Citi derides as too conservative would have ADM earning $2.80 per share this year. Hang a $37 price tag on these earnings, and you're still only looking at about a 13x multiple on the shares -- not unreasonable given consensus estimates of 10% 5-year earnings growth. And remember that Citi thinks ADM will actually earn more than $2.80.

Tack on ADM's tidy 1.8% dividend yield, and I see every reason why Citi's prediction could come to pass.

Let's go to the tape
Plus, have you noticed how well Citi has been doing with its food industry picks lately?

I mean, I know that "past performance is no guarantee of future success" and all, but with a few notable exceptions, Citi's been doing awfully well in this industry, scoring about 59% accuracy on its Food Products picks. It's done even better, farther down the food products supply chain, stocking up on big percentage gains at food retailing recommendations like Walmart (NYSE:WMT) and Kroger (NYSE:KR).

And lest we forget, the last time Citi recommended taking positive action on ADM (specifically, selling the shares back in April), that advice wound up beating the S&P 500 by a good eight percentage points. When you combine this track record with the stock's entirely reasonable valuation, I think Citi's upgrade here is pointing in the right direction.

Point and counterpoint
All that being said, there are reasons to doubt that ADM will outperform. One very big reason would be the $5 billion in net debt that ADM carries. Another might be the firm's 30% revenue drop last quarter, a steeper plunge than either Bunge or Corn Products experienced. And a third would be the fact that, over the last five years, ADM has reported earning $8 billion in profits -- even as its free cash flow plunged to nearly negative $320 million. (Fortunately, ADM has been free cash flow-positive so far this year -- but it still only amounts to just 64% of reported earnings.)

If you're looking for a reason to ignore Citi's advice on this one, there are three good reasons for you right there.

So what do you say, Fool? Is it time to harvest a few ADM shares, or should we pick this weed and toss it into the fire? You've heard what Citi has to say. Now tell us what you think.