This Just In: Upgrades and Downgrades

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycles 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 tell you what the analysts said. We 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 worst and sorriest, too.

Speaking of the best ...
Shares of Cisco Systems (Nasdaq: CSCO) got a boost Friday as a Wachovia analyst initiated coverage on the stock with a buy rating. Funny thing is, buy-rated Cisco's stock went up much less than the rest of the Nasdaq. Now why might that be?

Perhaps it was because this particular buy rating was less an "initiation" and more a "continuation." You see, while Wachovia may not have covered Cisco prior to Friday's announcement, A.G. Edwards did. Before Wachovia bought A.G. Edwards, that is. As it turns out, the analyst who rated Cisco a buy at A.G. Edwards before, and the analyst now rating it a buy at Wachovia, are one and the same person.

What's in your toolbox?
This throws a bit of a monkey wrench into our standard operating procedure in this column, where we ordinarily take an analyst's recommendation, and compare it to the analyst's record, to determine if the rating is worth paying attention to. However, it's not a unique situation. Alert readers will recall that we saw something similar a couple months back when an ex-Prudential analyst, having joined BMO Capital Markets, returned to her old stomping grounds with an "initiation" on Procter & Gamble (NYSE: PG). In such a situation, what we want to do is examine not just the record of the firm making the new call on Cisco -- but also the record of the analyst's old firm.

Fortunately, CAPS makes this easy, because we've been watching both A.G. Edwards and Wachovia, and have records worked up on each. Let's take a look at a few picks from each.

 

Company	Wachovia said:	CAPS says:	Wachovia's pick beating (lagging) S&P by:
Deere (NYSE: DE)	Outperform	****	48 points
Cummins	Outperform	****	49 points
Lehman Brothers (NYSE: LEH)	Outperform	**	(22 points)

And at A.G. Edwards, we have:

 

Company	A.G. Edwards said:	CAPS says:	A.G. Edwards's pick beating (lagging) S&P by:
Varian Semiconductor (Nasdaq: VSEA)	Outperform	*****	78 points
Google (Nasdaq: GOOG)	Outperform	**	28 points
J.C. Penney (NYSE: JCP)	Outperform	**	(32 points)

As you can see, Wachovia is strong in the industrial sector (not so hot in investment banking), and A.G. Edwards had a strong track record in tech (less so in retail). Ordinarily, I'd say Wachovia's unimpressive CAPS rating of 67.89 argues against following its advice on Cisco. However, this is a relatively new field for the banker. Its new crop of A.G. Edwards-trained tech analysts bring a good record with them (an All-Star CAPS rating of 85.32), and the Cisco-grading analyst beat the S&P 500 by 26 points over the last year he rated the stock a buy.

For this reason, I believe you should at least listen to "Wachovia" when it "initiates" coverage of Cisco with a buy. Mind you, the investment may not pay off. Cisco does sell for a pricey 28 times trailing earnings, and an almost-as-high 23 times trailing free cash flow, yet is expected to grow profits at no more than 15% per year over the next five years. That valuation makes me leery -- but based on the analyst's record, I'm going to give him the benefit of the doubt on this one.

 

© 2007 Universal Press Syndicate.