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." While the pinstripe-and-wingtip crowd is entitled to its opinions, down here on Main Street, we've got some pretty sharp stockpickers, too. (And we're not always impressed with how Wall Street does its job.)
Given that, perhaps we shouldn't be giving virtual ink to "news" of analyst upgrades and downgrades. And we wouldn't -- if that were all we were doing. Fortunately, in "This Just In," we don't simply tell you what the analysts said. We 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 ...
For the second time in as many weeks, Wall Street's bashing on Nuance Communications
With just a few hours remaining before Nuance reports its fiscal first-quarter 2011 earnings, Wedbush came out with a downgrade to "underperform" (read: "sell") Tuesday. Unlike Goldman and its short-term worries, what worries Wedbush is the longer-term picture at Nuance.
You see, when last week Goldman warned us about how Nuance's switchover to a subscription-based revenue model posing a threat to short-term revenues, and profit margins, that was short-term concern. In contrast, Wedbush tells us today that it actually believes Nuance will "report in-line results" this evening. (According to StreetInsider.com, Wedbush tells us the company is doing well selling software into the health care industry. The analyst even suspects we could see a bump in Nuance's price if the company succeeds in "nudg[ing] up guidance.")
Invest for the long-term
And yet, the long-term picture worries Wedbush. Peering into the future, Wedbush scribbled out a laundry list of competitors that look set to eat away at Nuance's key text-to-speech, speech-to-text software market share. There's the biggies of course -- Microsoft
Highlighting a special concern -- and a real threat to Fools who might be buying Nuance in hopes of getting bought out themselves -- Wedbush mutters aloud that "even key customer Apple appears to have taken a keener interest in offering its own speech products." [Emphasis added. As in, "offering its own products, and not buying out Nuance."] Meanwhile, the analyst worries that there's "friction" afoot with Nuance partners like Alcatel-Lucent
In short, the competition for Nuance is growing. According to Wedbush at least, it's gaining "traction against Nuance," and the safest course of action is to either sell Nuance now, before it gets a chance to report any more bad news tonight -- or in the best case, if the stock gets a bump on improved guidance, sell into that strength and get out while the getting is good. Is Wedbush right?
Let's go to the tape
I very much fear that it is, and here's the reason why in a nutshell: When it comes to picking software stocks, there probably isn't a better analyst in the Universe than Wedbush Morgan.
According to our CAPS data, studying software is Job No. 1 at Wedbush Morgan. With 53 picks to its credit, software is the single biggest industry Wedbush covers. What's more, over the four years we've been covering its performance, Wedbush has racked up a startling record of near-70% accuracy on its recommendations in this industry, including such winners as:
||Outperform||*||83 points (picked thrice)|
|Informatica Corp.||Outperform||***||299 points (!)|
Wedbush is also a successful predictor of Nuance's own trajectory, having picked the stock to outperform way back in early 2008 -- and beating the market by a good 12 percentage points on the pick up until making yesterday's downgrade.
Foolish final thought
Now admittedly, I'm already inclined to favor Wedbush's argument against Nuance. After all, what the analyst told us yesterday was pretty much the same things I said about Nuance last week -- up to and including expressing worries about the stock's too-high price.
That said, Wedbush Morgan's record of sterling accuracy in the software sector is the clincher. If my arguments against Nuance's overvaluation and growing competition didn't convince you last week, take it from the folks with the 70% accuracy rating in software. Wedbush knows software stocks, and Wedbush says Nuance is a sell.
Fool contributor Rich Smith owns shares of Google. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 722 out of more than 170,000 members. The Motley Fool has a disclosure policy.
Google and Microsoft are Motley Fool Inside Value recommendations. Salesforce.com, Google, and Vmware are Motley Fool Rule Breakers picks. Apple and Nuance Communications are Motley Fool Stock Advisor selections. Nuance Communications is a Motley Fool Hidden Gems choice. The Fool has written puts on Apple. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Apple, Google, and Microsoft.
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