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.

VTB Capital -- come on down!
This week, we're being treated to an unexpected event -- the arrival of a new analyst on the Wall Street scene, as Russian investment banker VTB Capital crosses the North Pole to deliver a pair of new buy ratings to the U.S. steel industry. (Everybody say hello to our new analyst: "Zdravstvuyte, VTB!")

Specifically, the companies getting thumbs up from VTB this week are AK Steel (NYS: AKS) and U.S. Steel (NYS: X) -- and to be honest, the ratings couldn't come at a better time for these steelmakers. Lately, you see, these companies have been hammered by a whole slew of downgrades from better-known bankers in the U.S. Citigroup, Goldman Sachs -- and even yours Fool-y -- we've all been ganging up on the steelmakers.

Who the heck is VTB?
Now you may be wondering -- what the heck does a Russian bank know about U.S. steelmakers, and why does it think it knows more about them than do the metals industry experts at local American banks? But in fact, there's good reason to think VTB knows a thing or two about the steel industry in general, and America in particular.

For one thing, Russia is home to a pretty big steel (and coal) producing operation itself -- Mechel OAO (NYS: MTL) , $12.2 billion in annual revenues strong, and traded on the NY stock exchange. It's also home to not a few steel producing plants for the world's biggest steelmaker, ArcelorMittal (NYS: MT) . For another, VTB has its roots in international commerce. In fact, the bank's original name, Vneshtorgbank, literally translates as "International Trade Bank."

There is one thing VTB does not appear to know very well, however -- and that's when a stock is a dog, more suited for a "sell" rating than a "buy."

Time to sell U.S. Steel
So why is VTB Capital dead wrong about U.S. Steel and AK Steel being "buys?" In a nutshell, because when an investor puts money in the stock market, he's usually looking to earn a profit on his investment. And the best way to do that is by investing in companies that are themselves earning profits. Which neither U.S. Steel nor AK Steel are currently doing.

Sure, both stocks are expected to earn a profit next year. But with the steel industry as a whole expected to remain at 1% (or less) earnings growth over the next five years, even the 10 times multiples to forward earnings we see at U.S. Steel and AK Steel looking pretty pricey relative to next year's hoped-for profits.

The companies are also heavily indebted, with USX carrying a net debt load ($3.2 billion) greater than its own market cap ($3.1 billion), and AK carrying debt more than twice its market capitalization.

Foolish takeaway
Granted, the U.S. steelmakers may look like bargains relative to steelmakers VTB is more familiar with -- Arcelor with its $22 billion net debt load, and Mechel with net debt three times the level of its market cap. But relatively cheap is not the same thing as cheap -- and it's not a good reason to buy either U.S. Steel or AK Steel at today's prices.

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Fool contributor Rich Smithdoes not own (or short) shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 280 out of more than 180,000 members. The Fool has a disclosure policy.The Motley Fool owns shares of ArcelorMittal. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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