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.
Wall Street eats its own
How bad is the European sovereign-debt crisis going to get? Investors got another clue this morning, when American megabank Goldman Sachs (NYS: GS) announced that it's worried enough about things over in euro-land that it's decided to downgrade Brit banking rival Barclays (NYS: BCS) to "sell."
What has Goldman's pinstripes in a bunch? Surprisingly, it's not what you might think. It's not the risk that Greece, Italy, or whoever is going to default on its government bonds and leave Barclays holding the bag. That's a big problem with European banks, sure, but what worries Goldman more is the solution to this problem -- namely, a new proposal by Britain's Independent Commission on Banking. Without going into too much gory detail on the regulations, the ICB has proposed "ringfencing" Britain's biggest banks to create a virtual "firewall" between banks' retail operations (savings, lending, checking accounts) and their higher-risk investment banking operations. The aim is to ensure that if a bank makes a bad investing bet with its own capital, that portion of the bank that made the bad bet will be able to go bankrupt without destroying the savings deposits of ordinary banking customers.
It sounds like a good idea, at least for the customers, but according to Goldman, it's likely to cost U.K. banks about $16 billion in lost profits, creating a "structural disadvantage" relative to their competitors elsewhere around the globe.
More to the point, Goldman argues that the ICB regulation will have a disproportionate impact on major investment banking player Barclays (but less severe effects on Lloyds Banking Group (NYS: LYG) and HSBC (NYS: HBC) .) Consequently, Goldman appears to be standing behind its "conviction buy" rating on Lloyds from September and may be prepping an upgrade on HSBC -- which it now calls "a key holding" -- but Barclays? Goldman says it's time to dump it. Is that the right move?
Let's go to the tape
I suppose it might be ... but don't bet on it. You see, Fools, while Goldman Sachs is a megabanker itself, its record as recorded on CAPS shows conclusively that when it comes to rating its fellows, this Wall Street banker is less skilled than your average Joe Fool down here on Main Street.
In fact, when it comes to picking winners in the Diversified Financial Services industry -- peer banks such as Bank of America (NYS: BAC) , Citigroup (NYS: C) , or JPMorgan Chase (NYS: JPM) , for example -- Goldman's about twice as likely to underperform the market as to outperform. And that's the good news. According to our CAPS stats, only about 31% of Goldman's active recommendations in the Capital Markets space beat the market. And it does even worse with purely Commercial Banks (29% accuracy).
As records go, I have to say Goldman's is looking pretty tarnished already. And I fear today's downgrade won't do much to improve it. Goldman could be correct that investors are underestimating the impact of the ICB regulations on Barclays, but the more I look at the numbers, the more I think these risks are already baked into the stock price. Consider:
|Bank of America||NM||0.8||0.3|
Source: Yahoo! Finance. NM = not meaningful.
Valued on its price-to-earnings ratio, Barclays looks a bit pricey relative to the prices on offer at many major American investment banks. But on a price-to-sales or price-to-book basis, it's downright cheap. Indeed, only (profitless) B of A approaches Barclays in P/B or P/S cheapness, and the Brit bank looks like a bargain relative to JPMorgan Chase, Citi, and even Goldman itself.
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At the time this article was published Fool contributorRich Smithdoes not own shares of, nor is he short, any company mentioned above. The Motley Fool owns shares of Bank of America, JPMorgan Chase, and Citigroup.Motley Fool newsletter serviceshave recommended buying shares of Goldman Sachs. Try any of our Foolish newsletter servicesfree for 30 days. 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.