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This Just In: Upgrades and Downgrades

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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.

Somebody get them a Dramamine
Pity Citigroup. The Wall Street megabanker is binging on crow again today, reversing an earlier downgrade for the second time this week. Second-guessing its own November downgrade on on Monday, Citi admitted that now's the time to buy after all. Today, the analyst has come to a similar conclusion regarding Research In Motion (Nasdaq: RIMM  ) .

As you may recall, Citi downgraded RIM to "hold" back in September on fears that the smartphone maker's profit margins were withering under the heat of increased competition from Apple (Nasdaq: AAPL  ) and Nokia (NYSE: NOK  ) . If Citi was right then, you'd probably expect the stock to have fared even worse over ensuing months, as:

Alas, if you had expected RIM to suffer, then just like Citi, you'd have been wrong.

Mmm, fresh crow!
As Citi now admits, far from falling further, RIM's margins appear to have "stabilized in the 42%-44% range." Combined with "stellar top line growth," Citi now expects the Canadian cell phone king to earn as much as $4.78 per share in fiscal 2011. Applying an approximate multiple of 20 to this projection, Citi comes up with a price target of $100 per share -- suggesting more than 40% upside to today's price.

"This call should be treated skeptically."
Four days ago, a humbled Citi prefaced its Amazonian retraction with this concession. After it made a wrong call in November, Citi fully expected investors to look askance at its recommendation to buy Amazon in April.

Well, second verse, same as the first, folks. Citi didn't think to warn us to ignore its advice on RIM today -- but I will.

Citi's off the RIM
Is Research In Motion doing better than expected? Yep. Is it likely to keep on growing and thriving for years to come? Indubitably. Consumers and businesses alike love the firm's "CrackBerries," and even a whole crop of shiny new Apple iPhones haven't been able to take the glow off RIM's prospects.

Unfortunately, those prospects are fully represented in the stock price already.

In fact, I'd argue that RIM's stock now provides a case study in "priced for perfection-ism." With only about $620 million in trailing free cash flow  to its credit -- less than a third of what RIM reported as net income for the last fiscal year -- the company isn't nearly as profitable as it lets on. (At least, not on the cash flow statement, where it really counts.)

Foolish takeaway
By my own admittedly conservative estimates, RIM stock should be trading for around $25 today. And while you may be skeptical of my number, with the stock now trading around $70, I believe that RIM's price is more likely to move closer to my estimate than to Citi's.

Plus, I'm putting my (virtual) money where my mouth is. As soon as this article posts, I'm going over to Motley Fool CAPS and rating Research In Motion an underperformer. Feel free to tag along and watch how the stock performs.

Apple and Amazon are Stock Advisor recommendations. Dell and Nokia are Inside Value recommendations. Garmin is a Global Gains pick. Try any one of these on us for 30 days.

Fool contributor Rich Smith does not own shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 291 out of more than 130,000 members. The Fool has a disclosure policy.

Read/Post Comments (1) | Recommend This Article (11)

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.

  • Report this Comment On April 28, 2009, at 2:53 PM, smaulcap wrote:

    Foolish takeaway

    "By my own admittedly conservative estimates, RIM stock should be trading for around $25 today. And while you may be skeptical of my number, with the stock now trading around $70, I believe that RIM's price is more likely to move closer to my estimate than to Citi's."

    $25.00? Oh yea?....That's funny. Real funny. May be sceptical of your number? No maybees about it. Your number is flatly unbelievable. Like I said...Real funny.


    "The stock plummeted after I left for another company. I had enough of Rim's chaos, dysfunctional culture, negative attitudes, low ball management style, abuses from dishonest and abusive work environment. Rim hires a lot of people who are cheap, incapable, and counter productive. Rim doesn't even pay mileage for workers out of town. The pay at Rim is cheaper than Apple or Microsoft. No stock options either."

    Gee...It's too bad you left RIMM and the stock plummeted. I guess if you had stayed with RIMM, the stock would have skyrocketed.

    Nothing like biased info from a disgrunteled employee on which to base a stock buy.

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