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." While the pinstripe-and-wingtip crowd is entitled to its opinions, we've got some pretty sharp stock pickers down here on Main Street, too. (And we're not always impressed with how Wall Street does its job.)

Given that, perhaps we shouldn't be giving virtual ink to "news" of analyst upgrades and downgrades. And we wouldn't -- if that were all we were doing. Fortunately, in "This Just In," we don't simply tell you what the analysts said. We 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.

When I said, "Buy," I meant "Don't buy."
In the annals of investing mistakes, it wasn't the worst blunder ever recorded, but Goldman Sachs' recommendation to buy U.S. Steel (NYSE: X) earlier this year wasn't its most shining success, either. This morning, Goldman threw in the towel, pulled its buy rec, and told investors to hunker down and just hold the stock.

Why? Well, this story begins with earnings. Yesterday, U.S. Steel reported improved demand for its products and better pricing as well. Nonetheless, higher input costs forced the company to book a $0.60 loss per share. That was worse than Wall Street had bargained for and sent U.S. Steel shares reeling for a 4% loss yesterday -- losses that are continuing to mount today. It was much worse than the $0.08-per-share profit that smaller rival AK Steel (NYSE: AKS) reported the same day (a result four times better than the $0.02 that AK Steel earned last year.) Goldman termed U.S. Steel's results both "disappointing" and "weaker than expected." (Natch. Else they wouldn't have recommended buying it.)

But the really bad news is that Goldman sees little hope for improvement at the nation's biggest homegrown steel operation: "We ... do not see any catalyst on the horizon to remain positive on the name. We had expected 1Q earnings and 2Q guidance to be a positive catalyst, but disappointment on both fronts has prompted us to significantly reduce our estimates and target price, and take our rating down to Neutral." As Goldman reasons, if U.S. Steel couldn't book a profit when steel prices were high, things are only going to get worse now that "steel prices are on a decline." Any improvement, if it happens, "could be few months away." But just how good is Goldman at predicting price movements in the steel industry, anyway?

Let's go to the tape
Actually, not very good. According to our CAPS stats, gathered over the course of more than a year of observation, Goldman is one of the worst metals industry analysts out there. Over the course of the past 15 months, it has managed to get just a couple of predictions right -- a bullish bet on Freeport-McMoRan (NYSE: FCX) and a bearish take on Olympic Steel (Nasdaq: ZEUS). Unfortunately, it has made serial goofs on everyone from manufacturers Nucor (NYSE: NUE) and Steel Dynamics (Nasdaq: STLD), to processor Reliance Steel (NYSE: RS).


Goldman Rating

CAPS Rating
(out of 5)

Goldman's Picks Lagging
S&P by

Reliance Steel Outperform *** 5 points
Steel Dynamics Outperform *** 19 points
Nucor Outperform ** 22 points

Source: Motley Fool CAPS.

And gotten U.S. Steel and AK Steel wrong besides.

Doh!-man Sachs
I could have told Goldman this would happen, of course (and in fact, I did.) The problem with recommending U.S. Steel back then was that the stock simply cost too darned much. Crunching the numbers back in February, I argued: "Take an overpriced U.S. Steel stock and multiply by an analyst with only 33% accuracy in picking winning steel stocks. Chance of making a profit on this recommendation? Zero."

Which brings us to today -- and the question: What does Goldman think you should do with U.S. Steel today? The answer may surprise you. According to the analyst:

  • "We believe that there will be another opportunity to get back in the name when we see some signs of a bottoming in steel prices …" [emphasis added]
  • And therefore you should hold the stock.

Yes, you read that right. Goldman is saying that U.S. Steel's price will decline, offering you a cheaper price at which to buy it. At the same time, Goldman says you should hold onto the U.S. Steel stock that you already own, and follow the price down. Astounding.

By which I mean, "astoundingly bad advice." I mean, think about it: Just like two months ago, U.S. Steel remains an astoundingly bad bargain for investors. Yes, analysts agree its profits are likely to rise 30% per year over the next five years. However, right now the company is unprofitable -- and I'm not sure how you can posit 30% profits growth on an unprofitable stock.  

Why, the company isn't even generating free cash flow. (To the contrary, U.S. Steel burned through more than $1 billion in cash over the last 12 months.) Sure, AK Steel is in the same boat, as are Steel Dynamics and Olympic -- most of the major steel players, in fact. If you feel you absolutely must own a piece of the U.S. steel industry, though, I'd suggest you at least avoid U.S. Steel itself, and invest in someone like Reliance or Nucor (which are at least generating cash profits from their businesses).

Fool contributor Rich Smith does not own (nor is he short) shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 560 out of more than 170,000 members. Nucor is a Motley Fool Stock Advisor recommendation. The Fool owns shares of Nucor. Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.