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 ...
When one of the best stock pickers in the business tells you to buy the stock that won last year's Motley Fool 2007 Stock Madness competition, what do you do? As a certain other stock picker (with whom you may be familiar) might put it: "Buy-buy-buy!"

This, of course, is the situation we were faced with yesterday, when CAPS All-Star Jefferies, a frequent visitor to the top decile of CAPS players that is currently ranked in the top 20%, recommended that investors dip their toes into Chesapeake Energy (NYSE:CHK). It's hardly an original suggestion. The Fool's own Philip Durell has been telling Motley Fool Inside Value members to buy Chessie for well over a year now (and those who listened are beating the market by nearly 40 points). But that doesn't mean Jefferies is wrong -- it's just late to the party.

Lauding "the underlying value of the company's assets," Jefferies predicts that we will see strong growth in both proven "reserves" and hydrocarbon production at Chesapeake over the next few years, including 20% production growth this year alone. Of course, reserves and production take a stock only so far. For Chesapeake investors to prosper, Jefferies also has to have a handle on where natural gas prices are headed in the future. So just what kind of record does Jefferies have in the oil and gas patch? Has it, for example, been calling fossil-fuel energy plays right in recent years?

Let's go to the tape
Turns out, it has. Focusing on oil and gas picks in particular, we find Jefferies' virtual CAPS portfolio stocked with some winning names:

And where does this banker go wrong? Well, it's been far from perfect in tech:

When you get right down to it, Jefferies is pretty hit-or-miss with most of its picks. Reviewing its broader record on CAPS, we find the analyst getting only about 52% of its calls right. Fortunately for Chesapeake investors, though, Jefferies has demonstrated a facility for picking winners in oil and gas. It's in large part because of points racked up in this sector that the analyst ranks in the top 20% of investors.

Foolish takeaway
Also fortunate for those investors, Jefferies looks to be right on the money with this pick in particular. When I look at Chesapeake, I see a stock that trades for a price-to-earnings ratio of 14 P/E but that most analysts expect will grow its earnings at about 18% per year over the next half-decade. The resulting PEG ratio suggests an undervalued stock.

At the asset level, I see a company that has nearly doubled its production of oil over the past three fiscal years but has more than doubled its proven reserves. A company that has more than doubled its production of natural gas … and nearly tripled its gas reserves: These facts, too, speak to the likelihood of growing rates of production going forward.

Put it all together, and I'm right there with Jefferies in rating this one a "buy." (Actually, I'm out a bit ahead on this one. If you check out my own CAPS profile, you'll see that I've rated Chessie an outperformer on CAPS for nearly a year now.)