This Just In: Upgrade or Downgrade

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 worst ...
With just two weeks to go before its new "Pre" cell phone hits the street, the Street hit Palm first. Wall Street Wizard Needham & Co. slapped Palm (NASDAQ:PALM) with an "underperform" rating early this morning.

Why? Although Needham believes Palm's new operating system, WebOS, is a "worthy contender in the smartphone market," Needham also realizes that valuation matters. Laments the analyst: "[U]nrealistic expectations of the platform's success are now built into Palm's share price," which has already tripled since Palm announced the new phone back in January.

Palm's shares are naturally falling in consequence. But the question for investors today is: Do Palm's prospects -- network support from Sprint (NYSE:S) and distribution through electronics superstar Best Buy (NYSE:BBY) -- trump Needham's expertise in consumer electronics? Let's find out.

Let's go to the tape
At first glance, the more than 2.5 years' worth of data we've accumulated on Needham's performance here at CAPS suggests Palm investors have little to fear from today's downgrade. After all, the analyst is scoring just under 43% for accuracy on its picks overall, and underperforming the market on the profits from these picks.

That said, if you turn for a moment from Needham's overwhelmingly underwhelming record on stocks generally, and focus instead on how it's been doing in the consumer electronics sphere, you might be in for a bit of a shock:

That's right, folks. On stocks in general, Needham may be a bit underwhelming. But in the sector in which Palm operates, the analyst looks more promising.

Reason for worry
It's also hard to argue with Needham's logic on this one. I mean, is Palm really worth three times more today than it was worth just four months ago? Because of a single product, which hasn't even hit the market yet? Seems a bit of a stretch.

And speaking of stretches, I have to agree that Palm's valuation is looking a mite tight right now. No profits last year. No profits expected this year. No profits predicted even next year. For a company that's got almost twice as much debt as cash, and that was -- at last report -- burning through $142.5 million in free cash flow in the last year, I personally have a really tough time putting a valuation on Palm today, let alone valuing its Pre-prospects for tomorrow.

Foolish takeaway
Needham's not the only one with reservations about Palm. Until we get a better idea of how successful the Pre will be, "caution" should be your watchword.