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 ...
Wall Street wizard Bernstein did its level best to boost the fortunes of MasterCard (NYSE:MA) and Visa (NYSE:V) shareholders yesterday. Initiating coverage on the two biggest names in plastic money, Bernstein advised investors to buy both ahead of earnings.

A fat lot of good it did 'em, of course. As the NYSE and Nasdaq each gained a percent or two, Visa rose less than half that, while MasterCard shares actually declined in value. But while investors who own the shares now might be disappointed at the market's reaction to Bernstein's initiation, new buyers may be elated: Here, it seems, is a chance to buy two hot stocks, both beloved of Wall Street, and get 'em both at close to the prices they fetched before news of the upgrade broke.

Ah, but is this a chance we should take?

Let's go to the tape
It really depends on whether you're "a gambling man." Because judging from Bernstein's record in the commercial lending sphere, that's just what an investment in its recommendations is: a guess. A 50-50 chance of being right.

After all, 50-50 is about how well previous Bernstein picks have fared:

In fact, if Bernstein does manage to go 50-50 on yesterday's picks -- beating the market with MasterCard, say, while losing with Visa -- it should count itself lucky. Because its record with banks with large credit card operations is even worse than its record on Commercial Banks, generally:

So why, I ask you, is Bernstein putting its already none-too-bright-'n'-shiny reputation on the line by making an outperform call on these stocks now?

After all, Visa's due to report its fourth-quarter earnings just hours from now, while MasterCard reports its news tomorrow. Why not wait a few hours till we all have a clearer picture of how the businesses are doing? Maybe see if investors overreact (one way or the other) to MasterCard's and Visa's reports, and see if a disparity in pricing emerges, that offers a good entry point?

Why not -- to be perfectly blunt -- wait for the facts, and make an informed decision?

Jump that gun!
My guess is that somebody at Bernstein noticed that average monthly sales rose 1.7% in Q4 2009, and card usage was up 5%. Reviewing these same numbers, The Wall Street Journal observed that in conjunction with major cost-cutting under way at the card companies, things are "finally working in [the card issuers'] favor." Rather than wait for the companies to confirm that opinion, however, Bernstein decided to beat the rush, upgrade on earnings eve, and collect the accolades when it's proven right.

Problem is -- that's not really a sure thing.

Safety first
After all, with both MasterCard and Visa trading at P/Es in the 20s, underemployment verging on 20%, and a consumer-led recession still far from over, there's no guarantee that the card giants are going to wow us today/tomorrow. And even if they do, well ... does anybody remember what happened with American Express (NYSE:AXP) last month?

AmEx beat estimates. (In fact, it nearly tripled last year's Q4 net.) Its CFO said the economy is "improving." And the stock still got killed. As of today, AmEx is trading down 7.5% from where it was pre-earnings.

Foolish takeaway
Now I don't mean to rain on Bernstein's parade or anything. Fact is, I don't know what we'll find in MasterCard's and Visa's earnings reports any better than Bernstein does. What I do know is that when you gamble on a "sure thing," you'd better have a record of betting right in the past, or you're liable to get burnt.

Bernstein doesn't have the record to justify such a bet. Jump the gun along with them, and you just might find you're playing Russian roulette.