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 track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

Oops. Did I say "hold?"
Fools rush in where angels fear to tread, goes the old saying. But this Fool is wondering: What was Barclays Capital thinking yesterday -- initiating coverage of the LED industry just days (and in one case, hours) before they reported earnings? Wouldn't it have been wiser to wait till the news was out, calmly digest it, and then pronounce judgment on who the likely winners are?

Ah, well. The damage is done. Yesterday -- just hours after Barclays assured investors there was little to fear from LED lighting specialist Cree (Nasdaq: CREE), out came the company with a third-quarter earnings announcement that was as frightening as anything you'd expect to see this Halloween season. Despite producing objectively strong revenue and earnings growth, Cree failed the "expectations test" -- missing Wall Street's targets for revenue growth, and promising similar sub-expectations growth next quarter as well.

Had Barclays waited just a few hours, it could have factored this news into its rating, and perhaps joined Merrill Lynch, Morgan Stanley, and Gabelli in advising more caution on the stock this morning. Instead, Barclays dined on a breakfast of crow this morning, after having praised Cree's "quality leadership" and reassured investors that the stock would be trading at $52 a share a year from now. (It might still, but to do so, Cree must first battle back from the loss it's been suffering today.)

Damage done, more to come?
But onward. Sure, Barclays goofed on Cree, but that wasn't the only LED pick it made yesterday. It assigned a similar "equal weight" ranking to LED-production equipment manufacturer Aixtron, and climbed even farther out on the limb on Aixtron's rival, Veeco Instruments (Nasdaq: VECO), to give that one an "overweight" rating. Could these picks perhaps work out better for Barclays and its clients?

Let's go to the tape
Yesterday's Cree-gaffe notwithstanding, I have to say: If past performance is any indicator at all of future success, then the chances are good Aixtron will at least pace the market's return, and Veeco outperform them. Because when it comes to semiconductors (LEDs are a close cousin of the kinds of chips sitting within your comp today) and the companies that make them, there are few analysts on the planet with a record to rival Barclays':

Over the course of making more than two dozen picks in the industry over the last two years, Barclays has racked up a record of better than 61% accuracy in Semis. As a whole, its recommendations in this industry are outperforming the S&P 500 by a combined -- are you ready for this? Better sit down -- 796 percentage points!

Invest with the best
Impressed yet? Well, perhaps Barclays' specific comments on the future of LEDs will convince you. According to the analyst, the LED sector as a whole will grow its revenue at 25% per year over the next five years as "LED penetration transitions from small consumer devices to large-size [TV] screens, followed by general lighting." General Electric (NYSE: GE) certainly sees a future for the devices. According to Michael Petras, head of GE's lighting business, LEDs will eventually make up 75% of his business within the next decade, compared to around 10% now.

There will be bumps along the road, of course (or perhaps, buzzing and sputtering among the overhead lamps would be a more appropriate metaphor.) In particular, Barclays sees an inventory oversupply hurting demand for LED units in Q4, and the analyst further warns that "aggressive capacity additions in China" could result in even more oversupply (and price competition) going forward -- but honestly, to me this seems more a worry for actual LED producers like Cree, and less for the companies that play the role of "arms suppliers" to this industry -- namely, Aixtron and Veeco.

For them, Barclays' bullish forecast still has the potential to play out profitably.