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...
Two of the better-known names on Wall Street weighed in with twin downgrades on Apple
First, Morgan Stanley downgraded the tech titan to "equal-weight" on fears that: "PC unit growth is decelerating and the remaining source of growth is increasingly the sub-$1,000 market where AAPL does not play." If that last bit sounds familiar to you, there's a good reason. Earlier this month, Lehman Bros. voiced similar concerns over NVIDIA's
Speaking of logic, RBC Capital Markets liked Morgan Stanley's thinking a lot. No sooner had MS finished picking on Apple than RBC launched a downgrade of its own. RBC's reason for reducing Apple to "sector perform?" You guessed it: The "worsening consumer spending environment."
RBC sees Mac sales slowing across the board, with surveys showing "40% of consumers plan on spending less on electronics the next 90 days." In RBC's view, this all adds up to an "elevated risk" of an earnings warning on the first quarter when Apple reports its year-end numbers next month. And in a market environment showing "little tolerance for downside surprises," RBC says its time to take some winnings off the table now -- before they disappear.
Let's go to the tape
Dire predictions indeed. But does either analyst know whereof it speaks? On Morgan Stanley, it's hard to say -- the analyst doesn't give ratings through our CAPS data provider, Briefing.com, and unfortunately, that prevents us from verifying Morgan's track record.
Fortunately, RBC does -- although its record is a bit unclear. Over the past couple of years:
- RBC has recommended Research In Motion
(NASDAQ:RIMM)twice. Its August 2006 pick outperformed the S&P 500 by 55 percentage points, which seemed impressive at the time. Then, for an encore, RBC beat the market by 79 points with its February 2007 rec.
- It also recommended Motorola
(NYSE:MOT)twice, only to close out both positions for a combined 46-point loss.
- RBC has an open rec on Nokia
(NYSE:NOK)-- a 28-point loser.
- RBC beat the market by 18 points with its now-defunct Apple recommendation.
- However, RBC seems to have little or no record on PC-makers other than Apple. As far as I can tell, the analyst hasn't said word one about HP or Dell over the past two years.
So where does all this leave us? RBC seems to have a fairly decent grasp of smartphones. Unfortunately, Apple doesn't just make iPhones. It also makes Macs. Heck, Mac sales are the key factor in RBC's whole downgrade! Yet RBC hasn't told us anything useful about the rest of the PC industry in years.
That got me wondering whether RBC might be shooting from the hip on this one; digging into Apple's numbers only increased my suspicions. You see, whether or not RBC's right about Apple's prospects over the next 90 days, when I look at the valuation, it's hard for me to conclude that Apple's not cheap today.
Short-term speed bumps notwithstanding, most analysts still expect Apple to grow its profits at 24% per year over the next five years. Yet the stock now trades for a P/E of only 21 -- and its price-to-free cash flow ratio is only 15. For a cash machine like Apple, a proven innovator with legendary management, that price is well and truly ridiculous.
In closing, Apple shareholders -- I feel your pain. An 18% drop on two analysts' bearish musings and a general market decline seems wholly unfair. But for long-term investors with cash to invest, it offers a compelling bargain. With blood running down the middle of Wall Street, I think now's the time to buy.
Fool contributor Rich Smith owns shares of Nokia. Dell is a Motley Fool Inside Value selection. NVIDIA and Apple are Motley Fool Stock Advisor recommendations. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 498 out of more than 115,000 players. The Fool disclosure policy surpises analysts every quarter.