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

And speaking of the best
What do you do when one of the best stockpickers in the universe upgrades shares of one of the best tech names on earth? Personally, I listen up. And from what I hear, Blue Horseshoe loves Hewlett-Packard (NYSE:HPQ).

Er, make that Credit Suisse loves Hewlett. The Swiss stock star upgraded HP shares to "outperform" this morning, arguing that HP's printer and imaging units will recover early next year, resulting in higher-than-expected earnings. How much higher? CS predicts $4.26 per share, whereas 'most everybody else on the Street is looking for only $4.22.

Can you say "upside surprise?"
That seems to be what Credit Suisse is calling for. And if you take a close look at the banker's record -- as we have on CAPS -- you might agree. Over the course of three years picking stocks in the Computers and Peripherals industry, CS recommendations have beat the S&P 500's returns 63% of the time (including, incidentally, a past recommendation of HP itself). Other notable winners include:

Of course, HP isn't just a "PC's 'n' printer ink" shop anymore. Thanks to last year's acquisition of EDS, it's also one of the biggest names in IT consulting. And how have CS's picks fared in this arena?

As it turns out, CS is an even better stockpicker on IT stocks than it is on hardware -- 67% of this analyst's IT picks outperform the S&P.

And yet ...
Credit Suisse's record in the tech space notwithstanding, I've got a nagging suspicion that this time, the banker has missed an important point. I won't dispute the analyst's prestigious status, or HP's own acknowledged lead in the PC space ... and yet, no matter how hard I look at the numbers, I just don't find the stock overly attractive today.

Why not? Well, see for yourself. HP reported $7.3 billion in net earnings over the last 12 months. Its free cash flow picture looks even prettier -- $9.4 billion in cash generated over the past year, or nearly 30% better than what this company reported to the IRS.

And yet, profit margins are slimmer than some competitors, and when you compare HP's profit to the firm's projected 9.7% five-year growth rate, the numbers just don't work. This stock sells for nearly 12 times free cash flow, folks. Nearly 16 times earnings. For a sub-10% grower, these multiples seem a tad optimistic.

Nobody's perfect
Now, toss in the fact that Credit Suisse has made at least a few bad calls in the computer sector in the past -- losing two percentage points to the market on its 2006 recommendation of IBM (NYSE:IBM), and seven points more on its recommendation of Dell a year later, and there's at least some basis for arguing that CS is, in fact, capable of making mistakes.

Foolish takeaway
Recommending slow-growth HP at today's price could easily be a mistake. As a business, HP may be the one to beat -- but as an investment, HP simply costs too much.

My advice: Don't click on this pick. Wait for better prices before following Credit Suisse's lead.