This Just In: More 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 ...
Earnings season is upon us, and the ace stock pickers at Standpoint Research have been very busy these past few days -- upgrading Adobe on Friday, then proceeding to downgrade Best Buy on Wednesday and Telecom Argentina on Thursday. But the analyst's highest-profile move this week has to be yesterday's decision to put Harley-Davidson (NYSE: HOG) out to pasture.

Noting that HOG has "outperformed the S&P-500 by ... > 2000 bps in the last six weeks," and attributing the rise to "takeover speculation," Standpoint scoffed at the rumor. "We oftentimes will use stock price rises due to takeover speculation as selling opportunities because > 80% of the time the rumors are baseless. In recent years we have dropped quite a few names that rose on takeover speculation -- none of those 'targets' were taken out and most have under-performed since we exited."

So following the philosophy that there's no better time than the present (to unload an overvalued stock), Standpoint pulled its buy rating on Harley and knocked the stock down to neutral. But did Standpoint bail on Harley too soon?

One word: "No"
Standpoint calls Harley "fairly valued at 90X trailing twelve months earnings, 28X estimates for 2010 and 16X (speculative) estimates for next year." With most analysts forecasting only 10% long-term growth for the company, I'm honestly not clear on why Standpoint thinks Harley is worth 16 times what it might earn next year. (The more so with the company selling for 90 times what it actually earned last year.)

But let's not quibble over details. The fact is that whether Harley was ever worth owning, Standpoint thinks it's not worthy of a buy rating anymore. Today, Harley sells for an enterprise value (EV) 17 times bigger than its earnings before interest, taxes, depreciation, and amortization (EBITDA) -- "the highest of any stock on our list of ... open recommendations." And as far as past recommendations in the automotive industry go ...

Harley costs way, way more than either Ford or Toyota today. And Standpoint has bailed on both of those recommendations as well.

Sell the rumor, and sell this news, too
As Standpoint points out, the reason Harley today commands an EV/EBITDA ratio 70% higher than Ford's, and nearly twice as high as Toyota's, is that someone, somewhere out there on the market believes Harley would make a nice bite-size acquisition for private equity.

It's not an unpopular view -- and it's not limited to Harley, either. The fact is, merger madness has taken hold of the markets of late. Seagate (NYSE: STX) told us it was on the block yesterday, and AOL is said to be interested in Yahoo! (shades of Time Warner?). Rumors of takeovers and M&A activity abound. Just yesterday, Barron's went public with a list of a half-dozen rumors it's been hearing:

• SAP, supposedly a target for someone or other with $80 billion burning a hole in their pocket, and wanting to make a big splash in tech. (Barron's called the very idea "silly.")
• EMC (NYSE: EMC) -- a more likely target in my view, considering the stock's attractive valuation, but much more than "bite-size" at $43 billion in market cap.
• The ever-acquirable Akamai (Nasdaq: AKAM), not much bigger than Harley, but selling for an EV/EBITDA that's simply insane -- nearly 22 times!
• Monster Worldwide, even more digestible at a sub-$2 billion market cap, but earning so little money from its business that I'm not sure who would bother to buy it.
• And bringing up the rear, Suntech (NYSE: STP) and Garmin (Nasdaq: GRMN) -- and who knows who else.

Stay away from the M&A hokeypokey
If you ask me, most of these merger musings are hokum. Barron's calls the ideas "crazy." Standpoint cites the simple fact that four times out of five, there's not a nugget of truth to 'em. If you are inclined to gamble on their being a basis in fact to these stories, however, I'd urge you to limit your losses. "Buy the rumor," sure, but only at a price that gives you some margin for error.

Unlike most of the M&A faves listed above, Seagate actually looks like a good bet. (At 2.2 times EBITDA, they're practically giving it away.) But both Suntech and Garmin also sell for single-digit EV/EBITDA multiples, helping ensure you don't pay too much for your gamble, while simultaneously promising to lure private equity interest -- and rumors of same -- like bees to honey.

Just don't be like Winnie-the-Pooh and get stuck in the honey jar when the rumors go away.