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 ...
In one of those double-jointed contortions of logic that only politicians, used-car salesmen, and Wall Street analysts can manage, Wall Street megabank Citigroup downgraded shares of XM Satellite Radio (Nasdaq: XMSR) to "hold" yesterday. Citi's reasoning? I'm not even going to paraphrase this -- you'll think I'm making it up. Here it is, straight from the analyst's mouth:

Satellite radio should continue to change the audio entertainment industry and gain share. ... Given the highly fixed cost base of the companies, we view the sub growth as the key driver of the stocks and we see the industry having up to 55 million subsripts by 2011. ... We believe that the proposed merger between [Sirius Satellite Radio (Nasdaq: SIRI)] and [XM] will drive significant costs savings ... we forecast ~$500 mil by 2010 ... and potential revenue synergies of another $400 million.

Wait, didn't you say Citi downgraded the stock?
Yep. Total head fake, right? You read through all that analyst-ese up above, and by the time you get to the end, you're sure Citi's going to tell you to buy XM. But in fact, it's already rated XM a buy, and now Citi's knocking the stock down to "hold." Perhaps the credit crisis has finally driven this banker bonkers -- but even if that's so, is Citi crazy like a fox?

Could be. Logic contortionist or no, Citi still ranks near the top 10% of investors as calculated by CAPS, and based on its 53% record for accuracy, it's right slightly more often than wrong. In particular, consider its predictions on:

Wow. Even after the lessons supposedly learned from the "great bubble burst," it's still a rare sight when a Wall Street analyst issues a "sell" rating. Yet here we see Citi assigning not one, but three sell ratings in industries not far removed from XM's. And Citi's gotten every one right.

Now let's flip Citi's chart over, and see how a few of its buy ratings in this space have fared:

Huh. So when Citi falls prey to irrational exuberance, it can suffer mightily. As it suffered in rating XM a buy up through yesterday's downgrade. Since recommending that investors buy XM back in January 2007, Citi's pick underperformed the market by a good 20 points.

Perhaps that's the real reason for yesterday's downgrade: Sour grapes over a pick that didn't work out? I really don't know what else to make of a series of what seem to be exuberant comments followed by a downgrade to hold -- any more than I know what to make of XM myself.

Through Fool-colored glasses
By all the metrics I hold dear, the stock -- and its dance partner, Sirius (Nasdaq: SIRI) -- look like total basket cases to me. No profits on their income statements; "cash flow" statements showing it flowing mostly out. Yet someone, somewhere, still sees value in these profitless wonders. While it hasn't done anything for Citi's reputation, XM is still beating the market over the past 52 weeks, and Sirius is, too.

Maybe in the Bizzaro world, where Citi and the satellite radio investors dwell, a downgrade is good news. Maybe that's why both XM and Sirius were up yesterday.