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." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.

But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we'll be tracking the long-term performance of Wall Street's best and brightest -- and worst and sorriest, too.

And speaking of the worst ...
Less than a week after Nokia (NYSE: NOK) received the mixed blessing of an upgrade (good) from underperforming stock analyst Cowen & Co. (bad), the company gets a bit of good news this morning: Morgan Stanley likes the stock, too. In upgrading Nokia to overweight this morning, Morgan Stanley did a complete 180 -- it had previously recommended "underweighting," or selling, the stock. Why the change of heart? It's actually quite an interesting story.

You see, five days ago, Cowen argued that a shortage of handsets on the market, which Cowen said ran to the "millions of units," might give Nokia the kind of pricing power that could short-circuit the cell phone industry's price war, boosting profits. Morgan Stanley comes to a similar conclusion, but by an entirely opposite route: It says Nokia will sell more phones than expected, take market share, and introduce new phones in the mid-to-high price range. In other words, Nokia will be selling more phones, and at higher prices -- a sure path to profits.

The way I see it, this is a much more logical argument in favor of Nokia than the one Cowen put forth last week (read the column again to see why). Moreover, it's coming from a much better analyst. In contrast to Cowen's anemic 31.59 CAPS rating, Morgan Stanley scores a quite respectable 89.78, putting it well within the ranks of CAPS All-Stars.

Morgan Stanley claims this title with the help of successful picks like:

And in spite of mistakes that include:

The way I see it, an endorsement from a top stock shop like Morgan Stanley should at the least cancel out the stigma of Nokia's having been picked by Cowen. Even more so when you observe just how well Morgan Stanley's picks of telecom and consumer electronics firms have done in the past. Clearly, this banker has a handle on the telecom industry. So why are Nokia's shares basically flat today, despite the upgrade?

Perhaps it's a simple matter of valuation. Morgan Stanley may or may not be right about Nokia's future. As for its past, though, that's firmly based in fact. And the fact is that with a trailing P/E of 18, Nokia just plain doesn't look cheap. Digging deeper to examine how well cash profits support the GAAP-based "E" in that equation, we find Nokia selling even more expensively, for more than 20 times free cash flow. Nokia's going to have to do better than the 15% compound annual profits growth its achieved over the last five years to justify that valuation -- and a heckuvalot better than the 12% growth that most analysts project for it.

In other words, Morgan Stanley had better be right about Nokia's growth if it wants to avoid getting dragged down toward Cowen's level.