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 ...
It's been an eventful few days for investors in Adobe (Nasdaq: ADBE) and Microsoft (Nasdaq: MSFT), both. On Thursday, rumors that the heads of the companies were meeting to discuss a merger sent Adobe on a bottle-rocket trip. At one point, the shares were fetching as much as $30 a stub -- 16.5% above the closing price Wednesday. But within hours, analysts had begun dumping cold water on the speculation:

  • Buying Adobe would not "address any of (Microsoft's) key challenges." -- Janney Capital
  • Collaboration to combat Apple's (Nasdaq: AAPL) progress in smartphones and tablet PCs was possible, but a full-scale buyout would provide few additional benefits. -- Oppenheimer
  • "Buy" Adobe. "The shares should go back to the low $30s in the next 12-18 months." -- Standpoint Research

Wait -- huh? What was that last one?

Wall Street spit-take
That last comment came from Standpoint Research, Fools. A firm that I rarely disagree with (a firm that -- to the contrary -- has provided very valuable input on the attractions of Best Buy and Western Digital). Unfortunately, Standpoint is wrong about Adobe. Absent a major miscalculation by Microsoft, and a takeover at a rich premium to today's price, Adobe is no "buy." Heck, it just might be a "sell."

Now don't get me wrong here. I like Adobe, and I respect Standpoint. One of Wall Street's verifiable "best analysts," Standpoint has done a fine job of picking winners in many niches of the market. In fact, historically, Standpoint has shown itself to be reasonable good on these kinds of software recommendations, outperforming the market on Symantec (Nasdaq: SYMC) and Check Point (Nasdaq: CHKP), but mildly underperforming on Microsoft and Amdocs (NYSE: DOX):


Standpoint Said:

CAPS Rating 
(out of 5)

Standpoint's Picks Beating 
(Lagging) S&P By:




15 points

Check Point



6 points




(2 points)




(2 points)

But the fact remains -- valuation matters, and at today's prices, Adobe is no bargain.

In defense of Adobe
Mind you, I think I see what Standpoint sees attractive about Adobe. A 30 P/E notwithstanding, Adobe holds hidden attractions on its cash flow statement, where $939 million in trailing free cash flow put the lie to Adobe's meager $474 million in reported "net income." Still, that's only good enough to bring the stock's valuation down to about 14.6 times FCF, which to my Foolish eye, isn't quite cheap enough in light of the company's projected 14.4% annual growth rate for the next five years.

Sure, Adobe advocates can argue the company's $1 billion net cash reserve makes the stock cheaper than it looks even on a P/FCF basis. But Adobe's proven itself a poor husbander of cash in the past, blowing $1.8 billion on the ill-considered Omniture buy last year. I mean, cash is great and all -- I wouldn't mind having a billion bucks myself -- but it's not worth as much as it should be when in the hands of spendthrift management.

Foolish takeaway
Predicting a rise back into the "low 30s," Standpoint Research seems to be arguing there's a good 20% to 25% profit to be made in Adobe stock today. I disagree. To me, the stock looks fairly priced at best, and dead money at worst.

My advice: Sharpen your value pencils, and stick to hard copy for now. This PDF is corrupted.

Fool contributor Rich Smith owns shares of Western Digital. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he was recently ranked No. 607 out of more than 170,000 members. The Motley Fool has a disclosure policy.

Best Buy and Microsoft are Motley Fool Inside Value picks. Check Point Software Technologies is a Motley Fool Rule Breakers recommendation. Apple, Adobe, and Best Buy are Motley Fool Stock Advisor picks. Motley Fool Options has recommended buying calls on Best Buy. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Apple, Best Buy, and Microsoft.

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