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 ...
Swiss equity powerhouse Credit Suisse started off the trading week with a smile and a big upgrade for Coca-Cola (NYSE:KO). Citing valuation (the shares have been marked down by a third over the last 52 weeks) and "underlying fundamental strength in key markets outside the U.S.," Credit Suisse termed Coke an "outperform," destined to beat the market's returns.

Good news? Investors seem to think so. They bid Coca-Cola shares up as much as 2% on the upgrade. (Then again, minirival Hansen Natural (NASDAQ:HANS) has been up 2% -- and nobody upgraded it.) But is the analyst's record good enough to justify a price spike of any sort, just on its say-so?

Let's go to the tape
Overall, Credit Suisse has a pretty decent reputation in investing circles. Over the two-plus years we've tracked the banker's performance, it's outperformed nearly 90% of the CAPS investing public. Credit Suisse has been on a roll of late; with 13 of its past 22 picks outperforming the market. Recent picks include the following:

Longer term, of course, CS' record tends to revert to the mean -- it's getting not quite 51% of its picks right, and outperforming the broader market by less than a single percentage point. That said, its picks in the beverage sector have tended to work out well:

And Credit Suisse also has a prior outperform rating on Coke to its credit; Big Red outperformed the S&P 500 by a coupla points over a nine-month run from late 2007 to mid-2008.

But there are two things that bother me about today's pick: Namely, the two key points on which CS hangs its hat.

Valuation
If you caught my recap of the earnings reports from Coke and Pepsi last month, you know that I'm not impressed with the valuation of either one. Whether you value Coke on its reported earnings under GAAP or its free cash flow, the stock sells for about a 16 multiple to either flavor of "profit." To me, that seems pricey for a stock that analysts expect to grow at about 8% per year going forward.

Foreign growth
The other issue I've got with Credit Suisse's upgrade is its dependence on seeing growth in "key markets outside the U.S."

True, international operations have been the highlight of Coke's growth story in recent years. At last report, the company got nearly three-quarters of its revenue from outside North America. But as I've pointed out in the past, much of this growth has depended on favorable exchange rates, in which an ever-shrinking U.S. dollar magnified the influence of profits earned abroad. As fellow Fool Jennifer Schonberger noted last month, recent currency trends are working to erode -- perhaps even reverse -- those gains for Coke. 

The longer this trend persists, the more it will work to undo the gains Coke has experienced abroad, imperiling Credit Suisse's "buy thesis" in the process. As I wrote back in April: "Currency exchange rate fluctuations giveth, and currency exchange rate fluctuations taketh away. Blessed be the name of euro." And the yen. And the yuan.

My advice: Keep this mantra in mind as you contemplate following Credit Suisse's advice, and buying into an already pricey stock.