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 ...
Let's all give a round of applause for investment banker UBS, which today triumphantly clawed its way back into CAPS’ top tiers of the nation's best financial advisors. Let's welcome it back with a profile of UBS' latest pick:

The price is right at Costco
An earnings warning might seem an unlikely catalyst for a stock upgrade, but that's exactly what we got last week. No sooner had Costco (NASDAQ:COST) warned that its second-quarter profits wouldn't be up to snuff, than out came UBS with an upgrade to "buy."

While the rest of Wall Street worried over just how "substantially below" consensus analyst estimates Costco's profits will be this quarter, UBS focused on the brighter side of Wednesday's warning, pointing out that membership renewal is doing well and predicting that items affecting margin (such as currencies, markdowns, and fuel prices) are letting up. (I imagine it didn't hurt that Costco's "bad" news helped to drive the stock down as much as 9% prior to UBS' making its play.)

But with Costco once again trading where it was at the beginning of last week, here's the question facing us today: Is it still cheap enough? I mean, it's all well and good that UBS got in at a lower price. Bully for them -- but did the rest of us miss the boat, or can we take UBS' "buy" recommendation at face value?

Let's go to the tape
We can ... but I advise against it. Sure, UBS is "back among the living" on CAPS. And at first glance, the analyst's CAPS rating near the top 10% of the investors we track looks mighty fine. I'll also grant you that UBS has made a few good-looking retail picks in its day:

But here's the thing. UBS' bullishness on the retail sector has hurt the banker about as often as it's helped ...

And in fact, if you look real close, I think you'll see that UBS is really not that much more accurate than the average coin flip. This banker's still getting only about 50% of its picks right. And while I hate to be a pessimist (OK -- you got me, I actually kind of enjoy it), the more I look at Costco today, the more I think UBS has flubbed the flip once again.

Why? Because the numbers just don't work for me. Costco sells for a 15.6 price-to-earnings ratio (P/E), but if you ask an analyst how fast they expect the company to grow, more likely than not you'll be told: "Oh, about 12.4% a year, for the next few years."

Now, that works out to only about a 1.26 price/earnings-to-growth ratio (PEG) on the stock -- perhaps not an unreasonable premium to pay for a star player like Costco. The firm has one of the strongest brand names in retail and healthy membership renewal rates, and it just turned in a decent same-store sales performance. Put it all together, and I actually think that 45 bucks and change might be a pretty fair price to pay for Costco.

Foolish takeaway
Problem is, in a market as chock-full of obvious bargains as this one is, I'm just not interested in settling for a "fair price." I want an out-and-out steal of a deal. And folks, in my book, Costco isn't it.

(Be aware, though, that this is just one Fool's opinion. In fact, Costco remains a recommendation of both Inside Value and Stock Advisor. Take a 30-day free trial of either newsletter and see who you think has it right.)