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.

Woe is Boeing
With a defense spending deficit yawning below it and a faulty 787 Dreamliner flying above, 2010 wasn't exactly a banner year for Boeing (NYSE: BA). Sad to say, 2011 isn't getting off to a much better start, as ace stock analyst Argus Research kicked off the new year with a big downgrade on Boeing stock yesterday. Arguing that delays in the Dreamliner program and defense spending cuts were not yet priced into the stock, Argus pulled its "buy" rating and downgraded the stock to "neutral."

Its timing couldn't have been worse.

Let's go to the tape
Before I tell you why, let's look at why Argus' recommendation to stop buying Boeing should have worked out so much better.

Judging from its record, Argus is actually a pretty good analyst when it comes to picking defense and aerospace stocks ...

... and, heck, even when picking stocks in general, for that matter. Within the CAPS universe of analysts, Argus consistently ranks near or within the top 10% of investors we track, getting the majority of its predictions right across all industries, and averaging an 11% "beat" of the market on each of its picks. Pretty impressive, huh?

Except for one thing
There is, however, one stock that Argus hasn't quite got a good grasp on: Boeing. Next to Lockheed, that's actually the worst-performing aerospace pick on Argus' scorecard, lagging the market by a good eight percentage points from when Argus first picked it in March 2010 through the close of the position yesterday. And call me a crazy optimist, but I think Argus is actually wrong twice on this one. Wrong first for picking the stock too early last year, and wrong for throwing in the towel on 2011 when the year's only just begun.

How dumb does Argus think we are?
I mean, consider the reasoning behind Argus' downgrade: They think defense spending cuts and 787 flubs are "not yet priced into the stock." Seriously, guys? You think investors are unaware of these issues? I disagree.

With the possible exceptions of the BP oil spill and the race to replace Simon Cowell on American Idol, I doubt there was a more reported story in 2010 than the ongoing troubles with Boeing's Dreamliner. Likewise, it seems unlikely that many investors overlooked the trillion-dollar story that is the multiyear spending drawdown at the Pentagon. To me, it seems unlikely investors are failing to figure Boeing's bad news into the stock's valuation.

To me, it seems more likely that -- given the sheer inundation of the bad news -- they've over-reacted, with the result that Boeing's stock has barely matched market returns over the past 52 weeks, despite huge prospects for profit once the Dreamliner gets back on track and the potential for even more profit as Boeing steals market share from Lockheed's beleaguered F-35 fighter jet.

Foolish takeaway
Last week, I clambered way (and I mean way!) out on a limb to make the case that Boeing just might turn out to be the best-performing stock of 2011. I won't rehash the arguments here, but suffice it to say that, for all the reasons Argus fears Boeing will fail to outperform the market this year, I believe the opposite.

I believe Boeing will get its 787 program back on track faster than we've been trained to expect. I believe that Boeing will surprise us (to the upside, for a change) with ever more success stories at its 737 and 777 airliner programs. I believe that Boeing will make lemonade out of the rotten fruit Pentagon budget cutters have been tossing at rival weapons programs.

Call me a crazy optimist, call me a Fool, but if you ask me, it seems these are the kinds of developments investors aren't factoring into Boeing's stock price today -- and neither is Argus.