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 it's worst and sorriest, too.

And speaking of the best ...
BP (NYSE: BP). Transocean (NYSE: RIG). Halliburton (NYSE: HAL). The Three Musketeers of the recent catastrophic oil spill have seen their stocks sunk in the wake of the Deepwater Horizon oil rig disaster. But in one of these stocks, at least, FBR Capital sees a real bargain.

Noting that, "The possibility of poor maintenance of the blowout preventer has been prominently featured in recent Congressional hearings and media reports, and it has raised investor worry that Transocean might have some liability as a result," FBR believes it sees the potential for "substantial upside" if the facts ultimately prove that Transocean was not at fault, or at least not negligent in its handling of the disaster. After all, FBR argues: "the blind shear rams [on the blowout preventer] ... were tested less than 10 hours before the blowout."

What if it turns out that "the reason that the Deepwater Horizon's blowout preventer (BOP) was unable to seal the well is most likely due to it being obstructed by gas hydrate formation"? After all: "All of the conditions for hydrate problems were present at [the] Macondo [well]: gas, water, time (waiting for cement to harden), high pressure, and low temperatures."

Well? What if that's how it turns out?
According to FBR, it would absolve Transocean of at least some responsibility for the disaster. This could, in turn, catalyze a bounce in the stock. And maybe FBR's right about that. After all, this analyst boasts one of the better records on CAPS, ranking in the top quintile of investors we track. And it's done at least a decent (not spectacular) job picking winners in the Oil & Gas space:

Call me a crazy optimist, but I suspect that this week's recommendation of Transocean will work out "well" for FBR, too -- over time. However, even if environmental factors conspired to prevent Transocean's blowout preventer from working, the company still owned the drilling rig that blew up. It operated the Deepwater Horizon. BP's acceptance of financial responsibility for the disaster notwithstanding, I think it unlikely that Transocean will escape a large portion of the blame for preventing the disaster from happening.

Drilling for dollars
But consider what we're seeing in the oil and gas space today. Companies totally unrelated to the Deepwater Horizon disaster are taking enormous hits to their share prices -- Chevron, Exxon, and Chesapeake are all down significantly since the rig blew up, and they are trading at single-digit multiples to next year's earnings. Halliburton and BP have been hurt even worse, dropping over 20% and 30%, respectively. But no one's fared as badly as Transocean, which at $54 and change, now sells for roughly 60% of its predisaster price.

But does any of this make sense? I mean, if you look at things logically, what do one dead oil rig and one closed well mean for the oil market as a whole?

Now granted, it's hard to isolate precisely which factors are behind the stocks' declines. Europe's debt crisis blew up almost simultaneously with the Deepwater Horizon explosion, and oil stocks are declining, I suspect, at least partly out of fear of not only an economic slowdown in Europe, but also a cooling-off in China.

But does even the combination of these two "blowups" justify the sell-off we're seeing in oil today? FBR doesn't think so, and I agree. Eventually, Europe will loosen the belt it is currently tightening. And even if China, Inc. is temporarily catching its breath, we've still got oil demand from a rapidly industrializing developing world to contend with.

Call me crazy, but I see all this as boding well for strong oil demand in future years. Yet even as Wall Street projects 15% annual growth over the next five years, this beleaguered stock is selling for a mere 5.5 times next year's projected profit.

Foolish takeaway
Does that sound like a bargain to you? It does to me.

Now don't get me wrong. Short term, I expect "headline risk" to continue to weigh on the stock. But long term, FBR's right on the money about Transocean. This stock is cheap, and whatever the catalyst that ultimately unlocks the value -- be it FBR's validation on the blowout preventer thesis or something else -- the value's still there. Just like an underground oil well, it's waiting to be tapped.