This Just In: Upgrades and Downgrades

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycles of upgrades, downgrades, and "initiating coverage at neutral." 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 worst and sorriest, too.

And speaking of the best ...
UBS has done it again, folks. Just one week after rethinking its position on ailing Home Depot (NYSE:HD), and deciding that the firm's low 12-times-2009-earnings multiple warranted at least holding the stock, UBS did a complete 180 on Big Orange's biggest rival this morning. It upgraded Lowe's (NYSE:LOW) all the way from "sell" to "buy."

Even UBS's reasoning was similar. The Swiss banker based its assessment on the reasoning that "[w]eakness in the U.S. housing market and troubles in subprime mortgages are likely to continue to weigh upon demand for home improvement products for at least the next several quarters."

Regardless, echoing its assessment of Home Depot, UBS argued that Lowe's low stock price "adequately discounts challenges in the broader industry." And the reason Lowe's gets a full thumbs-up, while investors are supposed to twiddle their thumbs, waiting for Home Depot to improve? UBS believes that Lowe's will steal market share from Home Depot, which should help its sales, and its shares, to outrun its rival.

Meanwhile, the analyst next door was saying much the same thing. JP Morgan cited Lowe's low price -- currently about 13 times fiscal 2008 earnings, plus "depressed expectations" and a "benign competitive landscape" (that means you, Home Depot), as good reasons to own Lowe's. JP Morgan raised its own rating on the stock from "neutral" to "overweight."

So UBS and JP Morgan like Lowe's. Pretty big names, but do the analysts behind the bronze nameplates deserve their gold-plated reputations? Let's find out.

Let's go to the tape
Actually, they do. At Motley Fool CAPS, we've been monitoring both of these bankers over the past year. What we've found is that they hold nearly identical CAPS ratings among the top 10% of investors: 91.38 for JP Morgan, 92.25 for UBS -- and nearly identical records for accuracy, getting about 51% of their picks right in each case. Taking a few recent examples from the flip side of the housing implosion -- the homebuying and home-improving financiers -- we find:

Meanwhile, next door:

Boilerplate
You know, they say that past performance is no indication of future success. But when all you've got is a hammer and not a crystal ball in sight, well, the hammer will just have to do. So picking it up and taking a whack at UBS's past performance as recorded in its CAPS graveyard of "ended" picks, I have to point out that the company nailed its most recent predictions on both Home Depot and Lowe's, beating the market by a margin of 12 and 3 percentage points, respectively.

So when UBS says it's time to buy Lowe's, that advice carries some weight with me. Also informative: the fact that with a trailing P/E of 15, and analysts on average predicting 15% annual earnings growth over the next five years, Lowe's looks pretty fairly priced to me today. Combine that with the fact that investors tend to overemphasize the recent past and project it too far into the future, and I see real potential for Lowe's to surprise us all by turning in stronger-than-expected growth if the current housing downturn ends sooner than everyone expects.

Reality check
Looking for a second opinion -- or in this case, a third or fourth? Then feel free to visit our CAPS board for either or both:

• Lowe's
• Home Depot

See what the top-scoring investors have to say about the prospects for each of these stocks. The best investor on Lowe's is currently outperforming the market by a good 20 points with his (her?) pick. And on Home Depot, the margin of victory widens to 23 points. And you may be surprised to hear that neither one of these players is an investment banker -- just an ordinary, individual investor like you and me.

Also, you can find further analysis of Home Depot -- a Motley Fool Inside Value recommendation -- and its chief rival, Lowe's, in the pages of the Inside Value newsletter. Free 30-day trials are available on request.

Fool contributor Rich Smith does not own shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 224 out of nearly 35,000 rated players. The Fool has a highly rated disclosure policy.