This Just In: More 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." While the pinstripe-and-wingtip crowd is entitled to its opinions, we've got some pretty sharp stock pickers down here on Main Street, too. And we're not always impressed with how Wall Street does its job.

So perhaps we shouldn't be giving virtual ink to "news" of analyst upgrades and downgrades. And we wouldn't -- if that were all we were doing. Fortunately, in "This Just In," we don't simply tell you what the analysts said. We also show you whether they know what they're talking about.

And speaking of the best ...
Today, we turn to one of the stranger "upgrades" to pass through the markets recently. On Thursday, veteran REIT investor Wells Fargo warned investors that Annaly Capital Management (NYS: NLY) was going to see its trailing income of $2.69 per share decline to $2.58 by year-end and then drop again to just $2.40 per share in 2012. Crunching the numbers, Wells suggested that its initial estimate of Annaly's value ($17 or $18 a share) was off by about a buck, and the shares could be worth as little as $16. (They cost $16.40 today.)

So naturally, Wells upgraded the stock and told investors to buy it.

Huh?
I know. Doesn't seem to make sense, does it? Wells thinks earnings are going to be worse than expected. The stock's worth less than when Wells had it rated "market perform." The stock, while seemingly cheap at 6 times earnings, actually looks expensive against mortgage REIT peers Chimera Investment (NYS: CIM) , American Capital (NAS: AGNC) and Invesco Mortgage (NYS: IVR) , which sell for 5.0, 4.5, and 3.8 times earnings, respectively. Yet Wells says all this makes Annaly a buy. Why?

According to Wells (as quoted on StreetInsider.com), the reason is basically this: Annaly is "the bellweather [sic] in the Agency REIT sector." It has "the strongest track record, expertise across a broad range of markets," and the potential to deliver "steady economic returns." While not growing particularly fast -- analysts have Annaly pegged for no more than 4% long-term earnings growth -- what Annaly lacks in speed, it makes up for in stability, and a dividend yield that pays out nearly 15% annually.

Growth, schmowth. Gimme predictability,
Not to put too fine a point on it, in a market where the Dow Jones Industrial Average (INDEX: ^DJI) has delivered less than 5% returns so far this year and was only recently in negative territory, there's a lot to be said for buying a stock that delivers a 15% income stream from it, no questions asked.

So I certainly understand where Wells Fargo is coming from with this upgrade. That doesn't necessarily mean I agree with it, though. It doesn't necessarily make Annaly the best choice.

Consider the alternatives
Consider: As a REIT, Annaly's dividend payout is necessarily tied to earnings. Indeed, the falling earnings that Wells thinks are likely suggest that the dividend rate might decline sooner rather than later. Companies like Redwood Trust (NYS: RWT) and Capstead Mortgage (NYS: CMO) may have smaller dividend yields than does Annaly, but if they can keep earnings stable or growing while Annaly earns less, then they could catch up to Annaly in the yield department eventually.

Foolish takeaway
After tracking Wells Fargo's performance in the REIT sector for five years now, our CAPS supercomputer tells us that this analyst is anything but omniscient when it comes to picking winners in the REIT industry. So far, the banker's batting about .443 here -- good numbers in baseball; less so in investment banking -- and underperforming the market by a combined 568 percentage points on its picks.

Though I have nothing against Annaly, and certainly nothing against collecting a 15% dividend check from any company, it seems to me there are probably better places for your money.

Actually, quite a lot of them. If investing for income is your primary objective, take a look at the Fool's new -- and free! -- report:13 High-Yielding Stocks to Buy Today.

At the time thisarticle was published Fool contributorRich Smithdoes not own (or short) shares of any company named above. You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 338 out of more than 180,000 members.Not everyone's as skeptical of Annaly as Rich is. In fact, The Motley Fool owns shares of Chimera Investment and Annaly Capital. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.Fool contributorRich Smithdoes not own (or short) shares of any company named above. You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 338 out of more than 180,000 members.Not everyone's as skeptical of Annaly as Rich is. In fact, The Motley Fool owns shares of Chimera Investment and Annaly Capital. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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