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." While the pinstripe-and-wingtip crowd is entitled to its opinions, we've got some pretty sharp stock pickers down here on Main Street, too. (And we're not always impressed with how Wall Street does its job).

Given this, perhaps we shouldn't be giving virtual ink to "news" of analyst upgrades and downgrades. And we wouldn't -- if that were all we were doing. Fortunately, in "This Just In," we don't simply tell you what the analysts said. We also show you whether they know what they're talking about.

I'm dreaming of an Akamai Christmas
So... did you have a nice Christmas? If every branch of your tree was festooned with a ribbon-wrapped Kindle Fire, every stocking stuffed with a Nook tablet, and the entire floor 'neath the tree covered in iPad 2s, I'm betting you still didn't make out as well as shareholders of Akamai Technologies (Nasdaq: AKAM  ) . Last week, news that Akamai was buying Israeli rival Cotendo helped lift the acquirer's shares 20%.

Not bad for a day's work. Paying $268 million for Cotendo, Akamai "earned" its shareholders an immediate 250% gain as market cap leapt $950 million. And if you ask Wall Street researcher Craig-Hallum, there's more where that came from. Upgrading the shares to buy, C-H argued that this stock that it previously believed was worth just $22 (less than the pre-announcement price) is now headed for $34.

Better late than never?
That's quite a turnaround, but it's not the strangest part of C-H's recommendation. The strangest part is the timing. After the big bounce, in which Akamai tacked on more than $5 per share in a day, C-H is telling investors to pile into Akamai -- but now there's only $2 worth of upside left.

Does this make sense? Is there still any reason to buy Akamai?

Let's go to the tape
Figuring this out would be a whole lot easier if Craig-Hallum submitted its stock recommendations to ratings aggregator Briefing.com for independent review. Unfortunately, it doesn't -- but that's OK. Turns out, while we lack a complete picture of this analyst's acumen, the good folks at StreetInsider.com do publish its updates on its ratings from time to time, and as a result, we've managed to catch a few glimpses of C-H's performance over the past several months.

Sadly, what we've seen has not been good. Take C-H's June recommendation that investors buy shares of money-losing battery maker A123 Systems (Nasdaq: AONE  ) , for example. At the time, C-H was very enthused over a contract A123 had inked with Navistar (NYSE: NAV  ) , to build electric delivery vans for FedEx (NYSE: FDX  ) . News of another big contract was expected shortly (it turned out to be General Motors), and C-H hoped to see big things out of A123. (For the record, I disagreed, and warned investors to sit tight and not buy profitless A123 "until we get a better idea of just what it is we're being asked to buy -- and how much it might be worth.")

How'd the recommendation work out? Fast forward a year and a half, and C-H finally threw in the towel and downgraded A123 to neutral after booking a loss of more than 60%. Amazingly, C-H managed to get this call wrong as well. By suggesting investors hold onto the shares, rather than sell at a loss (as I advised), C-H managed to lock itself into another 40% decline in share price at A123.

Things that make you go "Hmm..."
If you ask me, this latest recommendation to buy Akamai may not work out much better.

Consider: At $32 a share, Akamai shares already cost 31 times earnings. That's a better multiple than you'll find at rivals Level 3 Communications (Nasdaq: LVLT  ) or Limelight (Nasdaq: LLNW  ) , neither of which has any profits to speak of. But 31 times earnings still seems expensive for a stock most analysts feel will grow no faster than 14% per year going forward.

Don't expect the Cotendo purchase to do much to change this, either. With just $30 million in annual revenues (much less profits) to its name, this tiny company is less than 3% Akamai's size, and can't be expected to move the needle much now that it's going in-house.

Foolish takeaway
Shelling out $268 million for Cotendo last week, Akamai paid a price-to-sales ratio nearly twice as high as its own P/S -- nine times sales. That doesn't seem like much of a bargain, but in the company's defense, at least Akamai didn't pay 32 times sales. This, in effect, is which is what investors did when they bid up Akamai's market cap by 32 times the size of Cotendo's annual revenue.

This, to me, seems completely crazy. But if investors were crazy enough to pay that for Akamai last week, maybe, just maybe, they'll be crazy enough to follow Craig-Hallum's advice and buy even more shares in 2012. When you're dealing with crazy markets, anything's possible.

Akamai clearly felt it needed to own Cotendo's technology, but here at the Fool, we think there's only one stock you need to profit from the NEW technology revolution. Read about it in our new report, absolutely free-of-charge.

Fool contributor Rich Smith does not own shares of, nor is he short, any company mentioned above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 341 out of more than 170,000 members. The Motley Fool has a disclosure policy.

The Motley Fool owns shares of FedEx. Motley Fool newsletter services have recommended buying shares of FedEx and General Motors. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.


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  • Report this Comment On December 27, 2011, at 5:45 PM, carlkiefer wrote:

    That certainly was a whopper of a price for a privately held Israeli company's founders and stakeholders. That was a very special Hanukkah for some of their members.

    What you say is interesting because, Level 3's CEO, James Q. Crowe, has made public comments that Akamai will need to find a new sand box to play in since that, the owners of pipes with the necessary bandwidth throughput are going to rule the CDN space.

    What that means to inquiring minds, is that the price of CDN is probably going to resemble the price of legacy voice in the not too distant future, i.e. near zero.

    That's a hell of alot of price compression on one billion dollars worth of Akamai core CDN sales coming down pike, as they attempt to reach to the clouds and away from the sandbox they have historically toiled in down on the ground.

    Wonder who has been selling into this ridiculous billion dollar market cap rise since the news.

    This one is full of "sell the news" Wall Street idioms.

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