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 the week's trading ground toward a stop on Friday, BMO Capital Markets declared that it's time to put a stop to one trade in particular: selling Palm (Nasdaq: PALM  ) short. According to BMO, Palm's "many challenges" and "difficult environment" mean the stock has been properly pummeled down below $4 a share -- but enough is enough. "The value of the operating system, brand and [net operating losses] will keep the stock in a trading range, despite the poor fundamental outlook," BMO says.

But is BMO right? Is this truly the end of the sell-off?

Let's go to the tape
Maybe. In a field dominated by mediocre stockpickers, BMO stands out as a truly excellent analyst, ranking in the top 10% of investors we track on CAPS -- and believe it or not, it's actually a better tech analyst than it is in many other sectors. Over the course of the past three years, nearly 79% of BMO's picks in the Computers and Peripherals sector have thrashed the market's returns, including such successes as:

Companies

BMO Said:

CAPS Says
(out of 5):

BMO's Picks Beating
S&P By:

Seagate Technology (NYSE: STX  )

Outperform

***

82 points

Western Digital (NYSE: WDC  )

Outperform

***

50 points

Hewlett-Packard NYSE: HPQ)

Outperform

***

29 points

International Business Machines (NYSE: IBM  )

Outperform

****

20 points

BMO was also dead right about Palm itself. Calling the stock overvalued back in October, BMO has reaped the rewards, as its "market underperform" rating on Palm outperformed the market by a whopping 82 percentage points.

Same words, different tune
In truth, BMO's still not all that hot on Palm's prospects. According to BMO's analyst: "Palm [will continue to be] one of the share losers in the high-growth smart phone segment ... the company is too small to compete and the internally developed WebOS operating system is no longer a major differentiator." Regardless, says BMO, Palm's not going anywhere near $0. Rather: "The end game for Palm is ... to combine with a large OEM that wants to own its operating system and can leverage its brand and distribution platform."

And BMO's not the only one voicing this (sorta) bullish prognosis. Last week, fellow Fool Rick Munarriz also backed the buyout scenario, arguing that any of Dell (Nasdaq: DELL  ) , Hewlett-Packard, Microsoft (Nasdaq: MSFT  ) , or Nokia would be happy to lend Palm a hand -- and lucky to snag it at such a bargain price.

I disagree.

Palm shareholders, empty-handed
Given that Palm is unprofitable, has negative book value, is burning cash, and has a hidden boatload of preferred shareholders waiting to be paid off, I still see zero value in Palm's common stock today. Literally: $0.

Now, I'm sure BMO is right that some empty-headed tech CEOs out there will see nonexistent synergies in a Palm acquisition, but none of the players named above fits the bill. Microsoft won't be interested in Palm's Linux-based operating system, while Nokia already has Symbian to play with. Hewlett's simply too smart to make a bad buy, and while Dell might be just dumb enough to try it, it already has its hands full trying to digest Perot.

Foolish takeaway
When investors make a bad buy -- one confirmed to be bad when the stock self-destructs -- they often console themselves with the hope that "maybe somebody will buy it out." More often than not, however -- and with Palm in particular -- this hope turns out to be a pipe dream.

I've checked and rechecked, Fools, and Palm still has no pulse. All that remains is to pronounce its precise time of death.

Fool contributor Rich Smith has no position in any of the stocks named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's ranked No. 680 out of more than 160,000 members. Microsoft and Nokia are both Motley Fool Inside Value picks. Motley Fool Options has recommended a diagonal call position on Microsoft. The Motley Fool has a disclosure policy.


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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 March 29, 2010, at 12:19 PM, gwhitebeard wrote:

    PALM is a "Shook Out" company.... They failed on their own to develop a viable product in the "smart phone" market. DELL already has several viable offerings in this marketplace. A nifty smartphone that runs android AND a business oriented Tablet Reader/phone/computer with a back facing camera for conferencing that will bridge very well into their upcoming Business solution strategies. PALM is a damaged company based on their blatent lying about production stoppages and their failure to WARN before earnings. LEAVE them DIE.

  • Report this Comment On March 29, 2010, at 12:20 PM, gwhitebeard wrote:

    PALM is a "Shook Out" company.... They failed on their own to develop a viable product in the "smart phone" market. DELL already has several viable offerings in this marketplace. A nifty smartphone that runs android AND a business oriented Tablet Reader/phone/computer with a back facing camera for conferencing that will bridge very well into their upcoming Business solution strategies. PALM is a damaged company based on their blatent lying about production stoppages and their failure to WARN before earnings. LEAVE them DIE.

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