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.

And speaking of the best ...
As the trading week wound down Friday, Under Armour (NYSE:UA) shares caught a second wind, up 5% on a flat day for the market -- and a "buy" rating from Jefferies & Co. Predicting an upsurge in "new categories" will drive "new customers" to Under Armour, and citing a 20% drop in the share price since UA issued disappointing guidance last quarter, Jefferies says now's the time to buy ahead of fourth-quarter earnings.

But considering the magnitude of last quarter's disappointment, investors have to ask themselves today: Should we take Friday's profits and run with 'em, or might there be more in store?

When you consider Jefferies' reputation as an analyst, it's a fair question to ask. After all, this banker is not one of Wall Street's brightest, as tracked by CAPS. Its record of sub-50% accuracy on its recommendations barely suffices to win it a place in the top half of investors tracked by CAPS.

But here's the thing: While it's true that Jefferies is lagging many of its peers, a relative handful of very bad bets account for much of its underperformance: recommending that investors sell American Express (NYSE:AXP) and Advanced Micro Devices (NYSE:AMD) late last year, for example (AmEx has since doubled; AMD is up more than 200%.) The question today is: Has Jefferies had better luck picking consumer products stocks?

Let's go to the tape
In fact, it has. Although it's true that Under Armour isn't the most popular stock on the Street these days, when it comes to picking underappreciated retail and consumer stocks, Jefferies simply shines:

Indeed, twice as many of Jefferies' Specialty Retail picks are beating the market as lagging it. Within the Textiles, Apparel and Luxury Goods segment, Jefferies currently sports a perfect score -- two-for-two. And I have every confidence that its Under Armour pick is going to make it three-for-three.

Under Armour, overdeliver
While acknowledging Wall Street's disappointment with UA's guidance back in October, Jefferies argues that there is nevertheless: "a degree of conservatism to management's guidance." And it doesn't take a lot of looking to see how it comes to this conclusion.

In analyzing UA's performance last quarter, and the "disappointing" guidance ($830 million in annual revenues, $0.85 to $0. 87 per share in profit) that sank the stock, I myself pointed out how Under Armour has consistently lowballed the Street -- and how the i-bankers took the bait every time. In nine out of the last 10 quarters, UA beat the very same estimates that it itself helped to set with its guidance numbers.

Considering how marvelously UA performed in Q3 ($0.52 per share vs. $0.44 expected on a 16% jump in revenue), I made the logical inference that Under Armour "intentionally suggested light growth in Q4 so that it can more easily crush in Q4." And now it seems Jefferies has come to the same conclusion. Meanwhile, Wall Street steadfastly insists on taking the conservative guidance at face value, while investors tag gamely along, selling more than 20% of UA shares short.

Foolish takeaway
In which case, it behooves Foolish investors to ask: What is the likely result if, as both I and Jefferies expect, Under Armour returns to market next month and tells us that -- surprise, surprise -- it beat estimates yet again?

I'll give you the answer in two words: Short squeeze.