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 ...
"Strange. Your lifeline seems very short." Or so it seemed to be pronounced by Wall Street wizard Morgan Keegan yesterday, after conducting an impromptu fortune-telling session with smartphone maker Palm (Nasdaq: PALM). I paraphrase, of course, but that's the gist of Morgan's downgrade.

After learning that Palm's vice president of software and services has opted to resign from Palm -- and abandon his 400,000 stock options short of their $5.79 exercise price -- Morgan sees little likelihood that a Palm buyout is in the cards. Sure, rumor has it that Goldman Sachs (NYSE: GS) is seeking a buyer for Palm. According to Bloomberg, the megabanker was hired as early as this week to help find a potential suitor. Some are suggesting that Lenovo might be Palm's savior, while others, such as my esteemed-but-badly misguided colleague Rick Munarriz, suggest that Dell (Nasdaq: DELL) or even Microsoft (Nasdaq: MSFT) might fit the bill.

But to MK's way of thinking, it strains credibility to believe a senior VP at Palm would toss his options and walk out the door if he thought it at all likely that some mysterious savior is about to pay a premium to today's $5-and-change share price.

Is Morgan Keegan right about that? Does Palm have leprosy?

Let's go to the tape
If its record is any guide, then yes, I'd say there's a very good chance that Morgan Keegan's right on the money with this call. You see, within the pantheon of ace stock pickers, MK's star shines bright. This banker ranks in the top 5% of analysts we track, and within the Computers and Peripherals space, three of its four active recommendations are currently beating the market:

So yes, I believe Morgan Keegan's on the right track here.

Heads we win, tails you lose
Morgan Keegan also points to another indicator that Palm's not looking for (or likely to find) a quick, profitable-for-shareholders cash-out. Citing "recent regulatory filings from Palm" informing the SEC that it intends to grant restricted stock and pay retention bonuses to its high-level executives, MK concludes these are: "not activities that inspire confidence about Palm's ability or willingness to sell out at a premium valuation in the near term." Rather, they're indications that Palm is hunkering down for a storm, and intends to pay its captains-of-industry a handsome price to risk going down with the ship.

Problem is, as I described (quite thoroughly, I thought) back in February, "down" is precisely where Palm is pointed. A tie-up with iPhone-obsessed AT&T (NYSE: T) to distribute the Pre won't be enough to float Palm's boat, or reverse its slide toward last place in smartphone market share. Meanwhile, the company is burning cash like mad, and owes hundreds of millions of dollars to preferred stockholders. Even in the event of liquidation, I seriously doubt there would be anything left over for common-stock holders after Palm settles up with its creditors.

Foolish takeaway
Pardon the mixed metaphor here, but investors who've sunk their money into a losing franchise, and found themselves drowning in a sea of red stock tickers, often grasp for any straw in a storm. Maybe it's a new product that will enjoy wild success. Or the inestimable value of a company's intellectual property in liquidation. Or even an altruistic buyer who will disregard the company's balance sheet and buy it at an enormous premium, presumably out of the goodness of its heart.

But take it from a Fool who has been around the block a few times, and made the same kinds of mistakes that Palm shareholders are ruing today: It just ain't gonna happen.