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 …
In yesterday's column, Get Ready for the Fall, I explained why investors have been overenthusiastic about the prospects for Boeing's (NYSE: BA) 787 Dreamliner, and made the case for why Precision Castparts (NYSE: PCP), which makes titanium parts for the plane, was overpriced. Five-starred on CAPS and beloved by investors of all stripes, I nonetheless argued that everyone else was wrong about Precision Castparts -- and that I was right.

Well, chalk up one more point in favor of "everyone else," and one point against me.

No sooner had I declared Precision Castparts overvalued, than that oracle of Wall Street wisdom, Goldmans Sachs (NYSE: GS), issued its rebuttal. Noting that the "commercial original equipment outlook has improved significantly," Goldman called Precision Castparts "a major beneficiary" of improved rates that Boeing and Airbus are paying their parts suppliers -- and upgraded the shares to "buy." (In related news, Goldman raised earnings estimates for Boeing proper, and for another of its suppliers, fuselage maker Spirit Aerosystems (NYSE: SPR).)

But who was right? Big, bad Goldman Sachs, or little ol' me?

Let's go to the tape
Long-time readers of the Fool are already familiar with my record -- available to public review and subject to ridicule by all and sundry, 24/7, on Motley Fool CAPS. Goldman, in contrast, is a bit of an odd bird. Unlike scores of less-shy analysts, whose numbers are available for systematic collation and evaluation courtesy of the good folks at Briefing.com, Goldman discontinued third-party publication of its recommendations a few years ago -- making the evaluation of its accuracy an exercise in guesswork.

Or rather, it was an exercise in guesswork before I began building a Goldman record from scratch. Culling the newswires for hints of what Goldman was up to, I began building from scratch a CAPS record for the company late last year. Here's a glimpse:

So as you can see, within the aerospace and defense sector, Goldman's hit the ball outta the park on Spirit already -- but its record elsewhere is a bit spotty. While so far, we only have about a quarter's worth of data accumulated on Goldman, it's so far getting as many picks wrong as it does right. Not encouraging.

Boeing makes an oopsie
And speaking of "not encouraging" … Goldman's upgrade of Precision Castparts wasn't the only big news items in aerospace yesterday -- far from it. After markets had closed for the day, Boeing had an announcement of its own to make: Despite making major headway in getting its 787 Dreamliner off the ground this year and promising to begin delivering planes by year-end, Boeing's falling behind schedule. Again.

Boeing revealed a string of glitches in the certification processes for both its Dreamliner, and also the new 747-800 aircraft that Boeing's developing in tandem. The 747 is said to have experienced aerodynamics issues with its landing-gear doors and wing flaps in test landings. Meanwhile, the Dreamliner suffered an unplanned "in-flight engine shutdown" on one of its test planes in February, and it has not yet begun the Federal Aviation Administration's in-flight certification process -- a months-long process that Boeing really needs to get started if it's to pass certification this year.

Indeed, even Boeing's vaunted "ultimate load test," about which it boasted of completion Sunday, is said to require "more extensive analysis and review ... before the test can be deemed a success."

Foolish takeaway
Does yesterday's news mean that I'm right and Goldman Sachs is wrong about Precision Castparts? Hardly. One news item, on one day, does not a bull thesis gore. And this particular news item does not illustrate the key point I tried to make yesterday -- and the one that Goldman missed:

Selling for more than 18 times earnings and 23 times free cash flow, but expected to grow its earnings at only 14% per year over the next five years, Precision Castparts carries a valuation so high as to leave very little room for error. Everything has to go perfectly for this stock to flourish and reward investors. And what Boeing's news yesterday illustrates -- everything does not go perfectly.

Ever.