This Just In: Upgrade ... or Downgrade?

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.

And speaking of the best ...
Last Friday, as the Nasdaq dipped into the red, shareholders in at least one of its listed stocks were caught stealing a smile in secret. The stock: Grand Theft Auto publisher Take-Two Interactive (NASDAQ:TTWO). And the reason: a pair of enigmatic upgrades from two of Wall Street's lesser-known analysts.

According to ratings compiled by Briefing.com, both Morgan Joseph and Hilliard Lyons upgraded shares of Take-Two this morning. And while no one seems to know their reasons for upgrading for certain, it's not too hard to guess at their inspiration. Over the past few days, corporate raider Carl Icahn has bought more than 1 million shares of the games developer, raising his stake in the company to 12.3% -- a strong vote of confidence from the man who won acclaim for his (not always successful) efforts to turn around Blockbuster (NYSE:BBI), marry Yahoo! (NASDAQ:YHOO) to Microsoft, and make MGM (NYSE:MGM) grand once again.

If Icahn's interested, the thinking goes, then the rest of us should be, too. But before we run headlong to follow Icahn's lead, and buy Take-Two on these analysts' say-so, it behooves us to take a few moments and consider the record. Just how smart are these bankers, anyway?

Let's go to the tape
Answer: not very, and not always. Morgan Joseph, for instance, bears the ignominious distinction of ranking as one of Wall Street's very worst investors, as scored by CAPS. Fewer than half of MJ's picks succeed in beating the S&P 500's returns, and net-net, its 190-odd public recommendations have rewarded investors a cumulative 450-point loss to the market. Hardly encouraging.

In contrast, Hilliard Lyons' overall record is a bit better. This analyst, at least, gets most of its recommendations right, and Hilliard does particularly well with REIT picks such as Simon Property Group (NYSE:SPG). Problem is, while a savvy property investor, Hilliard's not much of a gamer:

Indeed, only one of the five software picks Hilliard has made in the last three years is currently outperforming the market. And as you can see above, every single one of its gaming software picks has gone awry. Should we expect anything different this time around?

One word: No
The way I see it, the bull thesis on Take-Two can basically play out one of two ways. Either (a) Icahn succeeds in persuading Take-Two to sell itself to a flush buyer, scoring a buyout premium for shareholders, or (b) Icahn twists arms and slashes costs to the point where Take-Two management can work itself into profitability.

Problem is, Icahn's not been very successful working option A strategies in the past. And as for option B, well, let's just say he's got his work cut out for him. With nearly $1 billion in annual sales to its credit, Take-Two currently loses $0.14 for every dollar's worth of electronic joy it sells. The company's burning cash faster than GTA players burn rubber, and while Icahn thinks he can pull a 180 on the business, 13.1 million shares sold short show that a whole lot of smart investors are betting he cannot.

Meanwhile, the shares are selling for 1.5 times their book value -- an out-and-out premium to the valuation carried by the only really strong profit-maker in the group, Activision Blizzard.

Foolish takeaway
Will MGM's biggest shareholder beat the odds and turn Take-Two around? Could Morgan Joseph and Hilliard Lyons be right in guessing that Take-Two will find its second wind?

Heck, yeah … anything's possible. Why, Take-Two's next big hit just might feature Catholic schoolgirls tooling around Toledo in a Pontiac Aztec. I just wouldn't bet on it.