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...
Like teens experiencing their first crush, there's nothing so cute as bankers in love. On Briefing.com, we read that freshman investment banker FBR Capital has been making goo-goo eyes at Captain of the Varsity Bailout Team JPMorgan Chase (NYSE: JPM). Paraphrasing FBR's comments: JP Morgan is "just dreamy" ... and rich!

"With 1Q10 assets of $2.1 trillion, JPMorgan is the second-largest bank in the U.S. and a major player in most financial services businesses." And while the other kids tease that JP has "clear risks to its business from both legislative and regulatory pressures domestically, as well as economic pressures abroad," FBR thinks "JPMorgan's universal bank model enables it to mitigate such pressures better than peers through capital redeployment opportunities."

Let's go to the tape
Sadly, I fear flattery will get FBR nowhere this time around. In the banking sphere, FBR is the proverbial "three-time loser." Its record in picking Thrifts and Mortgage Finance companies stands at an underwhelming 49%. In Commercial Banks, FBR scores a 46%, and in Capital Markets, FBR's struggling to stay above 30%. A few examples:

Simply put, FBR just isn't that good a judge of banking character. So when FBR opined yesterday that even after "pricing in worst-case scenarios," it found that "JPMorgan is positioned to outperform peers on both a relative and absolute basis," well, you'll understand if I had my doubts about the wisdom of this union.

Buy these numbers?
FBR may be blinded by love with this latest rating. I mean, of course JP Morgan is a superbly profitable banker. With the U.S. Government handing out interest-free loans that JP turns around and lends to us at 5% or 6% interest, how could it not be?

Amazingly, with profits essentially guaranteed, JP is only earning about an 18% profit margin from its "business." Still, despite profits being a given, the bank only makes enough money to value its stock at 15 times earnings -- not a lot for a company that most analysts believe will only grow at 8% going forward.

And while FBR may believe that growth rate is conservative, it's almost alone in that thinking. Just yesterday, FOX Business Network reported that financial reform efforts currently in Congress could force banks with large private equity and hedge fund operations to spin off these uber-profitable businesses, squeezing profits and constricting growth. Worse, as a legislatively mandated move, rather than an intentional business decision, such a spinoff could easily turn into a "fire sale." And would you like to guess who Fox Business says will get burnt worst?

That's right: JP Morgan.

Danger: Falling profits ahead
Fox Business isn't alone in fearing the worst for JP. In related news, investment matchmaker Citibank released a report this morning attempting to get a handle on what financial reform could mean for the earnings statements of JP and its peers. While admitting that the in-flux state of legislation requires it to make: "many assumptions about final rules and impact severity," Citi posits an 18% hit to earnings as its "reasonable and conservative" guess at how badly JP might suffer.

That's a bigger hit than many other banks should expect to see, by the way. Citi suggests financial reform will siphon off a mere 5% of BB&T's (NYSE: BBT) profits, and only 6% at American Express (NYSE: AXP). Even monolithic Bank of America (NYSE: BAC) should incur a lesser 16% hit to earnings. Citi thinks JP is only third in line for the worst damage, behind Goldman Sachs and Morgan Stanley (NYSE: MS), at 23% and 20% exposure, respectively.

Foolish takeaway
With a valuation today that only looks reasonable if JP grows faster than it actually can, and legislation before Congress that could actually slow down what growth JP can produce, I fear this week's endorsement of JP Morgan will end badly for FBR. My advice: Don't get entangled in this love triangle.