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 ...
"Sell in May and go away." It's one of the oldest maxims on Wall Street, and right about now, I'm thinking it's one that Hewlett-Packard (NYSE: HPQ) shareholders wish they had heeded. 

In the early days of May, HP shares regularly fetched prices north of $50, but after an "eventful" few months, investors can now easily pick them up for less than $40 a stub. HP share certificates are being priced as trash, and adding insult to injury, UBS came out this morning and confirmed that -- in its opinion, at least -- they're not worth much more than trash. 

In a report headlined "When Valuation Isn't Enough," UBS warned that the consumer PC market is looking weaker than expected, with more aggressive pricing evident at rivals from Apple (Nasdaq: AAPL) to Dell (Nasdaq: DELL)  -- none of which is going to be good for HP's profit margins. While UBS admits the shares look priced to move at "8.3x our revised FY11 EPS," the Swiss megabanker doesn't believe this low price is enough in and of itself to guarantee the shares will be worth more in the future. Result: a buy rating pulled, and a downgrade to neutral. 

But is that the right call?

Let's go to the tape
At the risk of violating another market maxim -- to not assume past performance is a guide to future success -- I'd have to say that this is probably the right call. Because as I scan the record that this analyst is racking up lately, I'm more than a little impressed with its skill at picking winners and losers in the Computers and Peripherals space: 

Company

 

UBS Says

CAPS Rating
(out of 5)

UBS' Picks Beating (Lagging) S&P by

EMC Corp. (NYSE: EMC)

Outperform

*****

62 points

Western Digital (NYSE: WDC)

Outperform

****

50 points

NetApp (Nasdaq: NTAP)

Outperform

**

24 points

HP

Outperform

****

17 points

Dell

Outperform

**

(6 points)

Sure, UBS seems to have made a misstep with Dell, but it's been right about EMC and so far right about HP and Apple as well; right even about Western Digital (albeit, this morning UBS pulled its support for that stock as well). In fact, as of this writing, fully 60% of UBS' computer industry recommendations are trouncing the market's returns. 

So I cannot help but agree when UBS tells us this morning that it has some concerns over 

  • A "need for higher tablet/smartphone investments."
  • Higher integration/M&A risk.
  • "Uncertainty with a CEO change." (There's that famously laconic European understatement at work, as Mark Hurd exits and quickly hops aboard Oracle (Nasdaq: ORCL).) 

But I'm worried, too. 

Valuation matters … but it's not the only thing that matters
Listen, I'm as big a sucker for an attractive stock price as the next Fool. And I admit, when I see a titan of tech like HP pegged to grow at more than 10%, while selling for the low, low price of just 10.7 times earnings, and 10.8 times free cash flow, I start feeling a mite greedy myself. 

That said, close examination of HP's recent performance shows that despite a string of revenue-plumping acquisitions, HP's free cash flow is now entering its second straight year of decline, and already sits below the firm's reported net "profits." Meanwhile, net debt is piling up, and as UBS points out, the turmoil in the CEO's office has created a real risk surrounding integration of HP's latest acquisitions. The man who planned these acquisitions has gone conspicuously absent, and is unavailable to shepherd them to profitability. 

To me, all of this creates real risk on the downside for HP. To me, it looks like UBS is going to be proven right again.

Rich Smith owns shares of Western Digital. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 555 out of more than 165,000 members. The Motley Fool has a disclosure policy.

Apple is a Motley Fool Stock Advisor choice. The Fool owns shares of Oracle. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.