The Worst Stock for 2007: Research In Motion

As I wrote in an earlier commentary, even great companies can sometimes make lousy investments. If the stock price isn't right, after all, prospective buyers should steer clear -- a point that, not coincidentally, leads directly to my nominee for 2007's worst stock: Research In Motion (Nasdaq: RIMM  ) .

Priced for perfection
Here we have a company that competes in an industry alongside well-heeled titans such as Microsoft (Nasdaq: MSFT  ) and Nokia (NYSE: NOK  ) -- as well as the not-so-well-heeled Palm (Nasdaq: PALM  ) -- yet trades with multiples that swamp those of its typical rival. Indeed, RIM's current price-to-earnings (P/E) ratio hovers around 62, while its aforementioned industry peers run with P/Es in the vicinity of 24, 16, and 4 (ouch!), respectively.

To be sure, growth is sometimes worth paying up for, and it's certainly worth noting that the five-year earnings-growth forecast for RIM pole-vaults over those of both Microsoft and Nokia. Indeed, analysts anticipate the company will grow its profits at a clip of greater than 20% per year over that stretch of time.

Color me skeptical
Apparently, those analysts are untroubled by the company's free cash flow (FCF) problem -- it's shed FCF in six of the past nine fiscal years. And, of course, it's always worth remembering that rosy earnings-growth scenarios have a bad habit of evaporating on contact with valuation reality.

The upshot? Well, when you bear in mind Peter Lynch's suggestion (in the still excellent One Up on Wall Street) that the "P/E ratio can be thought of as the number of years it will take the company to earn back the amount of your initial investment," RIM's P/E looms (pardon the pun) large. Indeed, at the current level, it's hard not to see how -- even after factoring in the ubiquity (for now) of the BlackBerry -- RIM isn't priced for perfection.

Or so says me
That's my take, and if you agree -- or even if you don't -- I encourage you to check out our new Motley Fool CAPS service, which allows you to match wits with the Fool's investment community. With CAPS, you rate stocks as prospective overachievers (relative to the S&P 500) or laggards over a time period you specify -- which, of course, is a critical piece of the investing puzzle.

I've tapped RIM as an underperformer for the next year, for instance, but if, as I suspect, valuation reality finally catches up with the company, I may reverse course and tap it as a prospective market-beater. I'm not so sure RIM is a great company, but at the right price, it could be a great investment: Just ask the folks who snagged the company at the beginning of this year, when it was trading at less than half of its current price.

To get started with CAPS, just set up your profile, and begin rating stocks. As you'll see, it's a blast -- and absolutely free to boot. Have fun!

Want to go back to the beginning of our Worst Stock for 2007 tournament?Right this way.

Microsoft is anInside Value recommendation, and Palm is a Stock Advisor selection. Try out either service free for 30 days.

Shannon Zimmerman runs point on the Fool'sChampion Fundsnewsletter service and co-advisesGreenLight. At the time of publication, he didn't own any of the companies mentioned. The Fool has a disclosure policy.

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