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.

It's the breadth, baby
"D'oh! What were we thinking, not buying Boeing (NYSE: BA)?!" That was the upshot of Goldman Sachs' table-thumping upgrade of Boeing yesterday.

Responding to its self-posed question, Goldman proceeded to explain: "We believe the key to what we missed, and why the stock can continue to outperform, is its breadth of leverage to positive global themes in the market today." Whether it's emerging-markets exposure that trips your trigger, or "consumer recovery," or "credit normalization," or "favorable industry structure" -- or maybe you just plain love the 787 -- Boeing's got it all.

Goldman acknowledges that other companies share in one or two of these big-picture bull theses. The banker cites General Electric's (NYSE: GE) exposure to economies in the so-called BRIC countries and Apple's (Nasdaq: AAPL) red-hot iPhones and iPads as "product stories" analogous to that of the 787's introduction. But while others may have one or two catalysts to their credit, the bull case for Boeing "spans nearly every positive global theme that is driving outperformance in stocks today." As these themes play out, the banker expects to see Boeing stock rise 35% over the course of the next 12 months, beating the S&P's performance with a stick.

But is Goldman right?

Let's go to the tape
Hmm. Maybe not. Granted, we've only been tracking the analyst's performance for about half a year now (since noticing that Goldman had cut off its voluntary submission of ratings to Briefing.com). But even over such a short span of time, the trend doesn't look good. See for yourself:

Turns out, Goldman is batting only about .429 on its Aerospace and Defense picks -- a great record in baseball, but in investing ... not so much. The analyst's record certainly doesn't provide a lot of reason to trust Goldman this time; the more so because the valuation of the stock is starting to look awfully iffy.

Valuation matters
Boeing sells for the princely sum of 42 times trailing earnings. Meanwhile, most major companies playing in the aerospace industry -- from United Technologies (NYSE: UTX) to Lockheed to Northrop Grumman to GE -- sell for less than 20 times. However, like most analysts, Goldman has faith that Boeing's earnings will pull out of their dive soon. In adding the stock to its "conviction buy list," Goldman posited $5.15 per share earned next year (a triple off trailing earnings), followed by $6.20 in 2012. I can hear the Boeing bulls already: "Hey, it only trades for 11.5 times 2012 earnings! What a bargain!"

But even if Goldman is right with its numbers (for the likelihood of this scenario, see Goldman's record in aerospace, above), this means that in buying Boeing today, you have to believe that it's a good bet to pay 11.5 times earnings, for an 8% long-term grower, when the earnings underlying your entire investment premise won't be known to be accurate for another 30 months.

Foolish takeaway
Apparently unlike Goldman Sachs, I remain unpossessed of a crystal ball. I therefore admit the possibility that Boeing will nearly quadruple its profits in under three years' time. I admit the possibility that everyone else on Wall Street is wrong about the growth rate, and that Goldman is right.

But given Goldman's record, I wouldn't bet on it. And you shouldn't, either.