This Just In: Upgrades & 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 tell you what the analysts said and stop there. No, we're here to hold Wall Street to account. We're going to tell you what the analysts said ... and then show you whether they know what they're talking about. Helping us in this endeavor will be Motley Fool CAPS, our tool not only for rating stocks but also for rating the analysts who rate stocks. With CAPS, we'll be tracking the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

And speaking of the best ...
Sometimes, it just doesn't pay to be popular. Yesterday was one of those days for Chinese online-search superstar Baidu.com (NASDAQ:BIDU). No sooner had the firm crushed analysts' estimates for fourth-quarter earnings than it got run over on Wall Street by a trio of less-than-flattering ratings. Within the span of a few short hours, both Citigroup and UBS downgraded Baidu from "hold" equivalents to "sells," while Brean Murray contented itself with removing its earlier "buy" rating and labeling Baidu a "hold." Considering the outsized emphasis investors often place on the opinions of the big investment banks, it will come as no surprise when I say Baidu got creamed -- down nearly 8% by day's end.

What gives?
So to recap: First, Baidu "beat earnings." Then Baidu got downgraded. Of course, the one didn't really lead to the other. Citigroup explained that the reasons for its downgrades -- and, presumably, those of its downgrades, were two: (1) Baidu's revenue growth appears to be slowing, and (2) the expense of expanding into Japan is squeezing Baidu's margins. As a result, management's prediction of $34 million to $35 million in revenues for Q1 2007 fell about $4 million short of Wall Street's expectations.

But is a $4 million shortfall in a single quarter, out of the hundreds of quarters still to come in this company's lifetime, reason enough to sell the stock? Citigroup and UBS seem to think so, but what do they know?

Here's what.
For the answer to that question, we turn to CAPS to see just how successful these three investment bankers have been with their past calls. The better their records, the more weight we'll likely want to give their opinions on Baidu.

And as it turns out, the three firms all have remarkably similar records. Each scores in the top 5% of CAPS players -- Citigroup with a 95.51, rating, Brean Murray with a 96.30 rating, and UBS coming out on top with a 96.72. (None, however, scores in the top 10% of professional Wall Street players.) Finally, each is right more often than wrong, by a ratio of about 55 to 45.

Now let's look at a few of those right and wrong calls:

Taken as a whole, the picture looks, at best, mixed. Each of the three firms scores well within the overall universe of CAPS players. None of them makes the top decile of Wall Street firms, however. None calls so many as six out of 10 picks correctly.

Contrary opinions, please?
Call me crazy, but I'm more impressed with the record of the Fool's own Rick Munarriz, the Motley Fool Rule Breakers analyst who recommended Baidu to our subscribers in November 2006. Even after Baidu's stock price cratered yesterday, his pick is still beating the market by a good 21 points.

In a column published after earnings came out yesterday, Rick gave his own view of Baidu, and it's a far cry from Wall Street's shortsighted view. I quote: "Shares have soared 38% higher since being singled out in the growth-stock service just four months ago. Baidu's penchant for clearing analyst targets in all but one quarter as a public company should keep the gains coming."

So there you have it, folks. Four widely varying opinions on Baidu. You've heard what the experts have to say. You've heard from us Fools. Now it's your turn. Log on to CAPS, and tell us what you think about the Chinese Google.

Motley Fool CAPS: It's fun, it's free, and it just might make you famous.

Fool contributor Rich Smith does not own shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked 23 out of nearly 23,000 raters. Sina, Silicon Labs, and TOM Online are Motley Fool Stock Advisor picks. Shanda is a Rule Breakers pick. Ctrip is a Motley Fool Hidden Gems selection. The Fool has a disclosure policy.