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." 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.)

Given this, 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.

Today, we're going to take a look at three headline-making ratings moves on Wall Street: downgrades for dividend dynamos Annaly Capital Management (NYS: NLY) and American Capital Agency (NAS: AGNC) , followed by a price-target hike for Visa (NYS: V) . Let's dive right in.

FBR attacks Annaly...
Probably the highest-profile move of the day is investment banker FBR's decision to downgrade Annaly Capital Management. On the one hand, Annaly delivered modestly bad fourth-quarter results last night, reporting $0.54 per share in "pro forma" earnings versus the $0.56 that Wall Street had been expecting. On the other hand, though, Annaly delivered... major disappointment. Net profits of $0.46 per share were down 76% versus last year's fourth quarter.

Pundits are already predicting that the lower earnings foreshadow a cut to Annaly's generous 13.3% dividend yield. After all, Annaly was already paying out more than it was earning in annual profit before the miss. I shudder to think what its payout ratio is going to look like once the financial data sites update their numbers. Meanwhile, FBR isn't waiting around to find out. It's revoking its buy rating, cutting the stock to "neutral," and lowering its price target to $16 per share.

And I can't say I blame FBR. As I mentioned last year, this stock's 12 P/E ratio, when weighed against consensus projections for mere 3% annualized growth, gives investors little reason to own Annaly other than for the dividend. If that gets slashed, the stock price will, too.

...and Sterne sacks American Capital
In related news, Sterne Agee took an axe to Annaly rival American Capital Agency this morning. In a precursor to Annaly's report, American Capital announced Monday that its own earnings came in light ($0.99 per share, versus $2.50 in the prior year's fourth quarter).

There's a special risk associated with American Capital, however. Popular financial data sites such as Yahoo! Finance, for example, are still promising investors a beefy 19% dividend yield on this mortgage REIT. But whereas we're only worrying about the possibility of a dividend cut at Annaly, we know for a fact that American Capital isn't going to be paying its full-billed amount. Announcing earnings, AmCap also warned that its first-quarter 2012 dividend will decline about 11% in comparison to the $1.40 paid out in the fourth quarter.

As management noted, this was "the first time in two and [a] half years that we have adjusted our dividend." It may not be the last. While currently boasting a better (meaning lower) payout ratio than Annaly, AmCap's $1-per-quarter profit, if it repeats more than once, could leave even this company with too little profit to maintain even the lower dividend.

My advice: It's time to take a good hard look at Chimera Investment (NYS: CIM) and Invesco Mortgage (NYS: IVR) . Falling earnings, followed by analyst downgrades, followed (or preceded?) by a tumbling dividend yield -- if it happened to Annaly and American Capital, it could happen to Chimera and Invesco, too.

Veni, vidi, Visa
Last but not least, let's not end on a down note -- instead, we'll take a look at some good news. Over at Stifel Nicolaus (a bona fide "Wall Street's Best" stockpicker), they're feeling downright optimistic about a financial stock of a different color. Already bullish on Visa, Stifel hiked its 15% price target for the stock, and now predicts the shares will hit $125 within a year.

Visa, as you may have heard, is expected to report earnings tonight -- $1.45 estimated for the first fiscal quarter of 2012. If that number turns out to be right, it would make for an 18% rise in year-over-year earnings, right in line with Wall Street's prediction for long-term growth at the company. Personally, though, I'd wait to see the actual numbers before following Stifel's lead on this one. (I mean, it's only a couple-few hours, folks. Why the rush?)

At more than 20 times trailing earnings, Visa's not exactly cheap -- it really only looks fairly priced for a projected 19% grower. Plus, free cash flow at the firm has lagged reported GAAP income for four years in a row now, suggesting the stock's not even as cheap as it looks. With a valuation that's only "fair," and arguably even a bit rich, I don't think you need to worry that Visa's share price will run away and "leave home without you."

Whose advice should you take -- mine, or that of "professional" analysts like FBR, Sterne, and Stifel? Check out my track record on Motley Fool CAPS, and compare it to theirs. Decide for yourself whom to believe.

And if you're looking for more profitable investing ideas in the world of high finance, read the Fool's new -- and free -- report on the industry: "The Stocks Only the Smartest Investors Are Buying."

At the time thisarticle was published Fools don't always agree on these things, you know. The Motley Fool actually owns shares of Chimera Investment and Annaly Capital Management, whileMotley Fool newsletter serviceshave recommended buying shares of Visa and Annaly Capital Management. But Fool contributorRich Smithdoes not own shares of, nor is he short, any company mentioned above.He does, however, have public recommendations available on 52 separate companies. Check them out on the Motley Fool CAPS page, where he goes by the handle "TMFDitty" -- and iscurrently ranked No. 375 out of more than 180,000 CAPS members. The Motley Foolhas adisclosure policy.We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors.

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