Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



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 track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

And speaking of the best ...
As morning broke across America today, the markets turned a bright shade of red. Contributing to the day's ruddy hue was .pdf specialist Adobe (Nasdaq: ADBE  ) , which has already dropped 6% in response to a downgrade from CAPS All-Star Jefferies Group.

Six percent -- that's quite a drop. But it's to be expected, given the magnitude of the downgrade. You see, Jefferies didn't just take Adobe down a notch. The banker did a complete 180 this morning, dropping Adobe all the way from "buy" to "underperform." Ouch. Citing just-completed "industry checks," Jefferies warned of a sequential drop-off in sales of Adobe's Creative Suite 3 in January, and predicted we'll see further softness in Adobe's business going forward.

Sounds ominous. But before we panic (well, judging from the stock drop, many people already have succumbed, but before you join in ...), let's look at Jefferies' record, and see if this analyst is really "all that."

Let's go to the tape
Judging from its record on CAPS, Jefferies is good -- if not quite as good as it thinks it is. The banker owes its place in the top 20% of investors to a series of superb stock picks that include:


Jefferies Said:

CAPS Says (Out of 5):

Jefferies' Pick
Beating S&P by:

BEA Systems (Nasdaq: BEAS  )



47 points

Google (Nasdaq: GOOG  )



20 points

VMware (Nasdaq: VMW  )



16 points

And yet, if you look closer, you'll see that Jefferies actually gets more of its picks wrong than right. A few of its losers:


Jefferies Said:

CAPS Says:

Jefferies' Pick
Lagging S&P by:

Boyd Gaming (NYSE: BYD  )



39 points

USG Corp (NYSE: USG  )



28 points

j2 Global (Nasdaq: JCOM  )



19 points

So overall, Jefferies has a decent record in the software industry. Jefferies gets the odd software-ish pick wrong, but not as wrong as some of its stinkers in other sectors. And while I'm tempted to rag on Jefferies for getting its last Adobe call wrong (Jefferies recommended the stock on Dec. 11, 2006, and underperformed the S&P 500 on that pick), two things prevent me.

First, Jefferies says the facts have changed. The analyst sees sales weakening at Adobe and is making the logical call in response. Second, I have been wrong on Adobe in the past. I rated this stock an underperformer in September 2006 on valuation grounds, was wrong about that, and underperformed the market by a couple of points as a result -- so I'm leery of throwing stones in this, my glass house.

Foolish takeaway
So is Adobe a "sell" now, or isn't it? After reading all the above, you may be surprised to hear that I'm not entirely convinced Adobe is a sell. You see, the reason I rated it a likely underperformer way back when was because the stock's price seemed too steep relative to the rate at which Wall Street expected it to grow. That's no longer the case, or at least not clearly so.

Sure, Adobe still looks pricey on a surface level. Its 28 P/E is far above the market average. But with $1.3 billion in free cash flow under its belt over the past four quarters, a stock price just 15 times that sum, and growth still projected at about 14%, Adobe looks, at worst, "fairly priced" to me.

Throw in the fact that Adobe's Creative Suite 4 is coming out later this year, and consider that customers might be waiting on its advent before buying -- which could explain the slowdown in Creative Suite 3 sales that has Jefferies spooked -- and I see real possibilities for this stock to outperform going forward.

So while Adobe's not yet priced to "buy," I don't think it's quite the "sell" that Jefferies is saying, either. Call this one a "wait-for-better-prices" stock.

Disagree? Feel free. Come on over to Motley Fool CAPS and tell me why Adobe's a screaming buy -- or a run-away-screaming sell.

Read/Post Comments (0) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 567285, ~/Articles/ArticleHandler.aspx, 10/21/2016 11:54:32 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 2 hours ago Sponsored by:
DOW 18,145.71 -16.64 -0.09%
S&P 500 2,141.16 -0.18 -0.01%
NASD 5,257.40 15.57 0.30%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/21/2016 4:00 PM
ADBE $109.03 Down +0.00 +0.00%
Adobe Systems CAPS Rating: **
BYD $18.65 Down -0.33 -1.74%
Boyd Gaming CAPS Rating: **
GOOGL $824.06 Up +2.43 +0.30%
Alphabet (A shares… CAPS Rating: *****
JCOM $67.44 Up +4.75 +7.58%
j2 Global Communic… CAPS Rating: **
USG $26.73 Up +0.83 +3.20%
USG CAPS Rating: ****