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 ...
Bed, Bath & Beyond (NYSE: BBBY) shares took a tiny tumble Thursday, knocked off balance by a downgrade to "underperform" from Arlington, Va.-based FBR Capital. The shares are already bouncing back today, however, which raises the question: Were investors right to sell off the stock yesterday or are they right to be buying it back today?

FBR naturally argues the former, noting that Bed, Bath enjoyed a sort of minicyclical bounce last year after archrival Linens 'n Things (LNT) filed for bankruptcy -- a bounce that's fated to subside. Prior to the bankruptcy filing, 34% of Bed, Bath stores had been dogged by LNT stores located within five miles of their location, and 57% had them within 10 miles.

All of this was bad for business when LNT was around, but after it resigned from the home furnishings game in December 2008, Bed, Bath was essentially the only game in town. FBR credits LNT's demise with giving Bed, Bath about a four-percentage-point bump in same-store sales in 2009, which the analyst argues are "the best it gets." This year, FBR argues, we'll see Bed, Bath's advantages diminish -- and the stock fall.

But will it?

Let's go to the tape
I'm not so sure. After all, it's not like FBR's proven itself infallible in the Specialty Retail space. To the contrary, over the three-plus years we've been tracking this analyst's performance, it's accuracy in this particular market niche is less than 50%, including such notable flubs as:

Which doesn't bode particularly well for investors who follow FBR's lead on Bed, Bath & Beyond today.

Linens 'n Things 'n' apples 'n' oranges
Nor does the analyst's reasoning sound all that convincing to me. For example, according to FBR, one good reason to step out of Bed, Bath right now is the fact that the company carries a higher forward P/E ratio than two of FBR's preferred picks in the sector, Home Depot (NYSE: HD) and Lowe's (NYSE: LOW). Now, that's true as far as it goes. But it ignores the fact that Bed, Bath is a superior business to either of those more workaday rivals. Both Home Depot and Lowe's carry sizable debt loads, for example, whereas Bed, Bath has no debt, but oodles of cash in its bank account.

I also don't buy the argument that just because Linens 'n Things is out of the picture, it's been clear sailing for Bed, Bath these past 12 months. I mean, what about Target (NYSE: TGT)? Wal-Mart Stores (NYSE: WMT)? Even Amazon.com (Nasdaq: AMZN) for heaven's sakes? I know that when I'm in the mood for a set of new bath towels, I price-shop all of these options. And last I heard, Target, Wal- Mart, and Amazon were nowhere near a Chapter 11 filing. Simply put, the Bed, Bath & Beyond vs. Linens 'n Things rumble-in-the-romper-room rivalry makes for a good story -- but it doesn't accurately reflect the business reality.

Foolish takeaway
FBR has never been an ace retail stock picker, and has led its clients astray on many a retail pick over the years. It looks to me like, in arguing against Bed, Bath this week, this banker is setting itself up for more of the same.