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 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 worst and sorriest, too.

And speaking of the best ...
Teutonic banker Deutsche Securities slapped a downgrade to sell on Palm (NASDAQ:PALM) this morning. Not exactly surprising, considering the superb earnings report just turned in by Research in Motion (NASDAQ:RIMM), the anemic report that Palm delivered, and today's advent of the much anticipated Apple (NASDAQ:AAPL) iPhone. But still, honest-to-goodness "sell" ratings are a rare breed on Wall Street. We know they exist, but you see them less often than an investment banker driving a Hyundai.

But might the downgrade be an overreaction? It comes just hours after a pair of earnings releases from two of the major smartphone players, and in the midst of a feeding frenzy of media attention surrounding the third -- hardly conditions conducive to reasoned analysis. Moreover, the analyst's repeated references to a need for Palm to feel "urgency" given "current market conditions" also suggest that a short-term-ist, frenetic viewpoint prevails at Deutsche.

At times like these, it behooves the rational investor to take a step back and refuse to get caught up in the hype, positive or negative. So with that objective in mind, let's examine Deutsche's long-term record once again.

Deutsche's record
It's been a long, long time since we last checked in on Deutsche Bank. Back in January, Deutsche possessed one of the very best records in all of CAPS Land -- a stellar 99.76 CAPS rating. Today, that rank has slipped a bit, but Deutsche retains a superb 96.47 (putting it in the top 5% of players), and a respectable 56% record for accuracy.

Examining a few of its picks in the communications sector, we find:

Pretty impressive so far. But even the best stock pickers make mistakes. Deutsche's include:

What I find most interesting, though, is that belying the near-hysterical tone of its downgrade this morning, Deutsche has actually been watching these companies for some time, and thinking about the implications of the iPhone's advent for its competitors, customers, and suppliers. Deutsche's recommendations on AT&T and Verizon, for example, date from way back in August 2006 -- and haven't wavered since. Moreover, Deutsche has been proven right over time.

For that reason, don't necessarily discount the bankers' sell advice, emotional as it appears on the surface. While Palm has been free cash flow positive since 2005, the anemic growth that analysts project for it -- just over 10% per year long term -- paired with a PEG ratio over 2 suggest that the current price may be appropriate.

Granted, Palm still bears the stamp of approval of Motley Fool Stock Advisor (and by the way, as badly as the shares have fared of late, we're still up 44% on our recommendation. Find out how we called it right when so many have called it wrong, when you claim a free 30-day trial to the service.). But unless and until Palm finds a way to prove those growth estimates overly conservative, I see little reason for the shares to rise in price.

Additional views available at ...
What? Three viewpoints on the stock aren't enough to help you make up your mind? Then by all means, get a fourth opinion. Check out what the score leader for Palm has to say about the company. You can learn the identity of this mystery stock picker, and find out what he (or is it she?) thinks about the stock when you visit Palm's CAPS page.

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. 879 out of more than 31,000 rated players. The Fool has a disclosure policy.