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 ...
Ever wonder what sound "one hand clapping" makes? Judging from the reaction to yesterday's upgrade, Palm (NASDAQ:PALM) investors seem to think it resembles a "barbaric yawp" of victory. They're wrong.

As you've probably heard, Barclays Capital upgraded Palm shares yesterday, removing its "Under Weight" rating and replacing it with one of "Equal Weight." In essence, the upgrade amounts to advising investors not to risk selling Palm short -- but not to rush out and buy the stock, either. Is that good advice?

Survey says: Probably yes
Now admittedly, Barclays is best known for its energy picks. Barclays spends more time advising on energy stocks than on any other sector in the market -- and it does well at it. For example, the banker picked both Suncor (NYSE:SU) and Peabody  (NYSE:BTU) to outperform earlier this year. Both of 'em have done just that -- trouncing the S&P 500's performance by 42 and 57 percentage points, respectively.

But while very much an "energy shop," Barclays is also no slouch when it comes to tech. Four of the five computers and peripherals stocks Barclays picked over the past year have beaten the market:

Barclays also boasts admirable accuracy ratings in the related sectors of wireless telecommunication services (67%), communications equipment (75%), and semiconductors and semiconductor equipment (69%). In short, if you're going to listen to anyone's advice on Palm, Barclays is the one to rely on.

But what exactly did Barclays say about Palm? It said this:

• Palm "faces ongoing competitive challenges, low near-term guidance ..."
• Sales expectations for Palm's Pre smartphone have been "tempered ..."
•  "Ongoing legacy product declines" eat away at existing revenue streams.
• Last but not least, initial European demand seems low due to "Palm's limited brand presence."

To Barclays' mind, this all adds up to essentially a neutral rating on the stock -- and a reduction in its price target to $11 per share (which is, by the way, below where the stock trades today).

Sound the barbaric yawp!
Forgive my rational lack of exuberance, folks, but I honestly don't get why Palm shareholders are applauding Barclays' upgrade this week. This wasn't any rousing endorsement of the stock. It was merely an admission that, while Palm looks slightly overpriced today, it's not so vastly overpriced as to necessitate selling it right now -- at best a one-hand clap.

Meanwhile, we're sitting here looking at a stock that's lost money and burned cash for two years straight, is well on its way to losing more money this year, and is only expected to earn $0.42 next year. That's a 27 forward P/E, folks, for a stock that most analysts don't think will grow much faster than 15% per year over the next five years.

Foolish takeaway
Do I even need to say it? Palm is way, way overpriced. The likelihood of its Pre becoming a runaway success is far from a foregone conclusion ... yet the certainty of such a result has already been baked into this stock price, set to broil, left in the oven too long, bubbled over, and caught fire on the grate.

Long story short, Barclays was right when it told you to sell Palm before. It's right again when it tells you not to buy.