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'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 ...
Motley Fool Rule Breakers recommendation Blue Nile (NASDAQ:NILE) got a much-appreciated boost this morning on an upgrade from "hold" to "buy," courtesy of investment banker Citigroup. Arguing that the market has gotten over-pessimistic about this year's holiday shopping prospects, Citi predicts that the e-tailer will sell as many as 90,000 diamonds and similar baubles this quarter. Meanwhile, the stock's 17% drop in share price since last quarter has given investors their Christmas wish -- an "attractively priced" gem.

If there's a flaw in Citi's argument, I suspect it lies in that last part: the idea that Blue Nile is undervalued. Seems to me, a 72 P/E is anything but attractive -- even if the business did grow its profits at a 20% average annual clip over the last three years. But let's not rush to conclusions here. Before deciding whether Citi's advice is worth heeding, let's find out how right it's been in the past.

Let's go to the tape
All in all, Citi seems to be a decent stock-picking shop, if hardly a prize. It gets (barely) more of its picks right than wrong, and the margin of victory on its correct calls suffices to earn this banker a 90.61 CAPS rating, just barely in the top 10%.

Here are a few of the good calls it's made in recent months:

So Citi seems to have a pretty good command of base elements -- copper, steel, and subprime paper. So what accounts for all the incorrect calls on the other side of Citi's scorecard?

Here we have three firms intimately involved in e-commerce ... and three flubbed calls for Citi.

Foolish takeaway
I don't know about you, but I find myself underwhelmed at Citi's record. Sure, the analyst makes the top decile of CAPS investors, but it does so more by virtue of the sheer quantity of its picks than their accuracy. And when it comes to Blue Nile, I just plain disagree with Citi's call. Mind you, Citi may be right that Blue Nile will exceed expectations this Christmas sales season. The analyst thinks that affluent consumers won't be hit as hard by the wobbly economy, and will continue to spend with abandon -- to Blue Nile's benefit.

The question in my mind, though, is just how much benefit Blue Nile will reap if, as I fear, its margins get compressed this quarter. E-shoppers like yours Fool-y will certainly have noticed Blue Nile's recent offer of 20% off purchases paid for via eBay's (NASDAQ:EBAY) PayPal. I expect that boosted sales, especially higher-margin purchases of as much as $500 -- the upper limit of the PayPal discount. But depending on how much cash PayPal anted up for this promotion, I have to wonder what that 20% price cut did to Blue Nile's margins. (On the other hand, I bet it worked wonders for eBay's revenue stream.)

You may also have noticed that the deal just changed to "save $50 on your order of $100 or more." Personally (and remember, I'm a cheapskate shopper), a deal like that tells me to grab the quick 50% discount, but pay not a penny more than $100. If too many shoppers think like I do, this latest iteration of the PayPal partnership promises to hurt margins more than the first version might have, and boost sales less. To me, that looks like a sign of desperation -- and a sell sign to boot.

That said, Fools of a feather rarely flock together. Of the people making calls on Blue Nile over on CAPS, over 75% rate it "outperform." That jumps to over 80% when looking at only the All-Star players, those who are better than 80% of their peers.

What do you think? Are you in with Citi, or are you in with Ditty? Sign up for CAPS and make your call. It's free and painless.