This Just In: Upgrades and Downgrades

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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." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.

"May you live in interesting times ..."
On a day like today (or yesterday), Confucius' old Chinese curse springs quickly to mind. Markets had a bit of a hiccup yesterday, as you may have noticed. But that steep drop gives savvy investors a chance to shop for bargains.

For that reason, I was ready and waiting for an onslaught of upgrades to appear on stocks now trading at cheaper prices this morning -- and I wasn't disappointed. In quick succession, Global Hunter suggested that investors buy into Bill Barrett (NYS: BBG) , Continental Resources (NYS: CLR) , Plains Exploration (NYS: PXP) , Transocean (NYS: RIG) , and W&T Offshore (NYS: WTI) .

I'll bite. Why?
On the surface, the reason for Global Hunter's gung-ho attitude toward the oil stocks seems obvious. Four of the five companies upgraded this morning "beat earnings" this week. (Transocean was odd man out in that regard, as idled oil rigs shifted its profit machine into reverse.) Yet all five stocks declined in price regardless. Seems like a no-brainer, right?

It seems equally obvious why you should believe Global Hunter that now is the exact right time to wade into the oil patch. After all, few analysts on this earth spend more time thinking about oil stocks than these guys. Global Hunter's top two industries of focus are, respectively, Oil, Gas and Consumable Fuels and Energy Equipment and Services. The analyst has made a combined 48 recommendations in those sectors over just the past two years.

Let's go to the tape
And Global Hunter has been remarkably prescient with its picks, outperforming the S&P 500 in each industry over those two years, and getting significantly more picks right than wrong. The analyst guessed rightly that oil services stocks Baker Hughes (NYS: BHI) and Halliburton (NYS: HAL) would outperform this summer. On the minus side, it warned investors away from ATP Oil & Gas last spring, saving those who listened from a 39% loss to the market.

Company

Global Hunter Rating

CAPS Rating
(out of 5)

Global Hunter's Picks Beating S&P by

Baker HughesOutperform****4 points
HalliburtonOutperform****11 poi nts
ATPUnderperform****39 points

So if Global Hunter is now throwing its weight, and its reputation, behind five more oil industry stocks, you should buy 'em in bulk, right?

Wrong. Apologies for the head fake, folks, but as much as I respect the record Global Hunter has built up in the oil patch so far, I think it's dead wrong about its latest series of picks. I mean, did most of these stocks exceed expectations yesterday? Yes. Did they get sold off anyway? Also yes. But does that make them cheap?

One word: No
Despite getting cheaper yesterday, not one of these companies looks particularly cheap today. Of the four stocks that "beat earnings" yesterday, Bill Barrett, Continental, Plains Exploration, and W&T each report negative free cash flow for the past 12 months. From a P/E perspective, Bill Barrett costs 29 times earnings, Plains sports a 41 P/E, and Continental trades for 100 times earnings. Yet none of them boasts a long-term growth rate greater than 18%. The most reasonably priced of the bunch -- W&T -- sells for 17 times annual profit, but with most analysts projecting flat earnings for the next five years, even that one is no bargain.

As for Transocean, the only stock on Global Hunter's buy list that failed to beat estimates yesterday, it costs about 18 times free cash flow. That seems like quite a lot to pay for projected 5% growth.

Foolish takeaway
Market crashes are heady times, but let's not lose our heads here, folks. Stocks got cheaper yesterday, but not all of them have become bargains as a result. If you're dead set on following Global Hunter's advice, though -- and again, with a record like the one this analyst boasts, I wouldn't blame you -- consider buying its already proven "winning" recommendations instead of one of the questionable newbies.

Both Halliburton and Baker Hughes are pegged for mid-to-upper 20s long-term annual earnings growth. Both sport reasonable debt loads and relatively attractive P/E ratios (18 for Hally, 22 for Baker Hughes). If you're looking for bargains in Big Oil, I'd start with these two.

At the time this article was published Fool contributorRich Smithowns shares of Google. You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 447 out of more than 170,000 members. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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