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 ...
Did you believe in Hewlett-Packard (NYSE: HPQ)? Did you enjoy the stock's greater than 55% run-up over the past year? Then now's the time to give yourself a pat on the back, take a victory lap ... and take cash off the table.

Or so says Standpoint Research.

Pointing to HP shares' position atop "a 10-year high yesterday," Standpoint argued that while the company is "fairly valued ... for a company of this size and growth prospects," at 1.1 times sales and 13 times earnings, the HP bull will soon get corralled. "The shares have run their course," says Standpoint. Now's the time to stop buying, and start tallying profits.

But is Standpoint right?

Survey says: Probably
By all indications, Standpoint is probably right on this one. After all, we're not talking about some run-of-the-mill, underperforming or barely performing analyst here. We're talking about Standpoint, which is ranked in the top 3% of investors we track and on a relative basis is one of the absolute best stock pickers on the market.

Sure, Standpoint isn't equally great in all areas of the market. It has met only limited success in the communications equipment category, for example, but HP has barely dipped its toes there.

Meanwhile, Standpoint boasts 100% accuracy in computers and peripherals (on an admittedly smaller base of just two companies), the very market segment where HP focuses its efforts:

So when Standpoint suggests that the bull has run its course at HP, and now's the time to take a breather on the stock, that's advice worth listening to.

But wait -- isn't HP still cheap?
Well, yes. Now that you mention it, HP is still a bit undervalued in my book. Although the company reports having earned "just" $8 billion in profits as GAAP calculates such things, the company generated nearly $11 billion in free cash flow over the past 12 months. The resulting valuation of 11.5 times free cash flow (on a projected 12.5% grower) tells me that HP bulls probably still have time to get in a few final snorts of profit before the bull runs its course.

But then again, even Standpoint isn't calling the top on HP just yet. To the contrary, the analyst suggests that "one of the best run companies in the S&P-500" could well hit $60 next year, and perhaps $65 by 2012. So there's 20% upside still to be had here ... if you're willing to wait around a couple of years to get it.

Bulls make money, bears make money...
... but pigs just get made into bacon.

And that's why I believe Standpoint's right on the money here. After the company gained more than 55% over the past year, bulls have already dined sumptuously on its profits. There's no need to get piggish about it. Or to mix my metaphors just a bit: Just because there's still fumes swirling around in the tank doesn't mean you should keep driving.

Plus, with a report in yesterday's Wall Street Journal that alleges that HP might be following IBM, Lucent, and Monsanto down the path of noncompliance with the Foreign Corrupt Practices Act, now seems as good a time as any to exit, stage left.

Foolish takeaway
Considering how very many bargains remain to be had elsewhere in the market, and the very real risk that HP will take a hit as the tale about alleged Russian bribery unfolds, I simply don't believe there's a reason to stick with HP. Not if Standpoint's right about the prospect for only 10%-per-annum returns over the next two years.

Heck, if that's all you're after, allow me to introduce you to my good friend the S&P 500 index fund.

HP's stock is up more than 50% over the past year. How do you know when "the train has left the station" and it's too late to buy? Here's how.