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 its worst and sorriest, too.
And speaking of the best ...
No sooner had we discussed Thomas Weisel's unfortunate upgrade of Apple (Nasdaq: AAPL ) yesterday, than a downgrade from a brother analyst came down the pike. This morning, Morgan Keegan contradicted its esteemed colleague, telling us to sell Apple. Sadly for investors, Morgan Keegan's downgrade was better-reasoned than Thomas Weisel's -- and made by a better Apple-picker.
The argument
As you'll recall, on Monday, Thomas Weisel argued that most everybody on Wall Street was wrong in predicting that Apple will grow at 22% per year going forward. Instead, Weisel, with its record of 37% accuracy on CAPS, argued that Apple will top those estimates and grow its sales at 24% per year; moreover, it will also expand its operating margins, resulting in profits growth somewhere north of 24%.
Morgan Keegan begs to differ. Says MK: "We believe the company will still take share in its Mac and iPhone product lines, but we expect PC industry growth expectations to dampen Apple's Mac growth as the year progresses." Why? It seems that Apple is poised to become a victim of its own success in the education market. With housing values tumbling, taking state and local tax bases down with them, school budgets will be strapped -- and this will squeeze funding for educational computer purchases.
Let's go to the tape
I have to say that Morgan Keegan's argument has the ring of logic to me, and it also plays into a trend I've noted at other companies that depend on tax revenue for their sales. What's more, Morgan Keegan has a record far superior to Thomas Weisel's. Whereas Weisel ranks in the bottom 20% of investors (as tracked by CAPS), MK scores in the top 20%, thanks to picks like:
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Company
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Morgan Keegan Said:
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CAPS Says (out of 5):
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Morgan Keegan's Pick Beating S&P By:
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Transocean (NYSE: RIG )
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Outperform
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*****
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83 points
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Noble (NYSE: NE )
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Outperform
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*****
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68 points
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That said, while MK is not as inaccurate as Weisel when it comes to stock picking, it's nonetheless far from perfect. According to CAPS, MK's accuracy record stands at just 51%, with a disturbing number of tech picks currently dragging it down:
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Company
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Morgan Keegan Said:
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CAPS Says (out of 5):
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Morgan Keegan's Pick Lagging S&P By:
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VASCO Data Security (Nasdaq: VDSI )
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Outperform
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*****
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25 points
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Palm (Nasdaq: PALM )
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Outperform
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*
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21 points
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At first glance, these numbers seem to paint the picture of an analyst very good at picking oil stocks, but not so hot on tech. Delving further into Morgan Keegan's record, however, we find a couple of "closed" positions that show a different picture:
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Company
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Morgan Keegan Said:
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CAPS Says (out of 5):
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Morgan Keegan's Pick Beating S&P By:
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Research In Motion (Nasdaq: RIMM )
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Outperform
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**
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70 points
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EMC (NYSE: EMC )
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Outperform
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*****
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36 points
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Foolish takeaway
So to sum up:
- Thomas Weisel likes Apple; Morgan Keegan does not.
- Thomas Weisel is a lousy stock picker; Morgan Keegan is a great oil stock picker that makes some significant mistakes in tech -- counterbalanced with some magnificent winners.
Based on the data, I have to say I'm more inclined to follow Morgan Keegan's advice to sell Apple, than Thomas Weisel's exhortation to buy. As I described yesterday, Apple stock sells for what appears to be a slightly overvalued price -- 24 times trailing free cash flow, versus 22% projected growth. To my mind, that's not a big enough premium to fair value to justify dumping the stock. On the contrary, I actually think Apple is attractively priced, and worth buying at today's price -- I just wouldn't go hog-wild about it. And Morgan Keegan's well-reasoned downgrade gives me even more reason to be cautious.
Do David Gardner and the gang at Motley Fool Stock Advisor agree, or would they call the post-downgrade sell-off a "buying opportunity"? Take a free trial of the Fool's flagship investing newsletter and find out.
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