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'll be tracking the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

And speaking of the best ...
When one of the best stock pickers in the known universe upgrades one of the hottest tech stocks on the planet, what do you do? I'll tell you what I do. I listen carefully -- then I write up a column real quickly for you to read.

Morgan Keegan may not be as famous as that "other Morgan." But according to our CAPS stats, you're much better off listening to the former's advice than the latter's. So when on Monday, Morgan Keegan announced it was upgrading Research In Motion (NASDAQ:RIMM) to buy, my Foolish ears perked right up. And when I saw that RIM ticked up on the news and then promptly fell down as much as 12%, ending the day down 4%, well, then I got really interested.

In CAPS-land, you see, few professional stock stars shine as brightly as does Morgan Keegan (MK). The company has a record of picking big winners more than 55% of the time, picking names both within the tech world and without, including a call on RIM that covered the latter half of 2007:

Has MK ever gone wrong? Oh, sure. Everybody makes mistakes:

Researching RIM
But the real question is, will yesterday's "outperform" call on RIM rank among MK's successes or add to its small roll call of blunders? Sending the stock down 4% despite the upgrade, Mr. Market certainly expects the latter.

And much as I'm impressed with MK's record, I'm forced to admit that I agree with everybody but MK on this one: The analyst jumped the gun here.

You see, while MK makes much of RIM's double-digit decline in price since its highs of late June, the fact remains: RIM is much too expensive to own. Sure, at first glance, the stock's 38 P/E ratio doesn't look too crazy if you agree with most analysts that earnings will grow close to 35% over the long term.

Foolish takeaway
And it's not even that I disagree with that growth estimate, necessarily -- it's RIM's P/E I take exception to.

The way I see it, RIM's GAAP earnings numbers vastly overstate the firm's true cash-generating ability, as measured by its free cash flow. Over the past 12 months, RIM generated only $876 million in free cash. It reported, however, over $1.5 billion in GAAP earnings. To me, that disconnect looks significant. Big enough, in fact, to erase any notion of RIM's current price offering investors a margin of safety.

Big enough, in fact, that were I trading the stock at all (I'm not, by the way), I'd be selling instead of buying Research In Motion.