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." While the pinstripe-and-wingtip crowd is entitled to its opinions, we've got some pretty sharp stock pickers down here on Main Street, 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 worst ...
Tuesday was that happiest of days for Research In Motion (Nasdaq: RIMM) shareholders. Not only did rumors of the long-awaited merger with Microsoft (Nasdaq: MSFT) (or was it Cisco (Nasdaq: CSCO)?) resurface, bolstering hopes of a buyout premium. The stock also received a brand new "buy" rating from the analysts at Hudson Securities.

The stock promptly dropped 2%.

Huh? What?
I know. Not exactly the result you'd expect. But consider: On the one hand, as StreetInsider.com reports, RIM merger-rumors aren't exactly a rarity. Turns out, they've been circulating since "at least" October 2010, when a UBS analyst began musing publicly that Microsoft would probably not buy RIM. Such non-denial denials often arouse more rumors than they put to rest, but UBS added fuel to the fire by proceeding to postulate that even if Microsoft doesn't buy RIM, Cisco very well might.

Buoyed by UBS' merger talk, RIM shares proceeded to gain more than 16% over the next couple of weeks. But unless I missed the memo, Cisco never did get around to buying RIM (nor did Microsoft.) Perhaps the reason RIM didn't rally on renewed merger talk, is because it's suffering from "Little Boy Who Cried Wolf" syndrome. But what about the buy rating. Shouldn't that, at least, have helped the stock?

Let's go to the tape
Not necessarily. As I think I mentioned, the analyst that upgraded RIM yesterday was Hudson Securities. Unfortunately, Hudson is -- how do I put this gently? -- not the sharpest analytical knife in the utensil drawer. To the contrary, according to CAPS -- where we've been tracking Hudson's performance for more than a year now -- fewer than half of this analyst's recommendations succeed in outperforming the market.

In addition to RIM, Hudson has four other communications equipment stocks on its recommended list today. Aviat and Ceragon Networks (Nasdaq: CRNT) are both outperforming the market currently, but both Nokia (NYSE: NOK) and Motorola (NYSE: MSI) are underperforming -- badly:

Fasten your seat belts
Pretty pathetic, huh? No way you'd want to agree with an analyst with this kind of record, right? Well, apologies for any whiplash this might cause, but here's where I'm going to throw you a head fake -- I actually agree with Hudson on the two picks it's "got wrong" -- and on Research In Motion, too.

As I argued back in January, slow-growth Motorola Solutions looks to me like a much better investment than its doppelganger, the now-spun-off Motorola Mobility (NYSE: MMI). Whereas the higher-profile handset-maker has won accolades from analysts, I prefer the profitable, cash-rich, and free-cash-flow-profitable side of Motorola. I'm also on record supporting Nokia's tie-up with Microsoft, on the theory that at six times free cash flow, and with billions of dollars worth of "financial support" promised from its new partner, Nokia is simply too cheap not to own.

Valuation always matters
It's for similar reasons that I continue to believe in RIM. Consider: With everyone and his brother predicting the imminent oligopolization of the smartphone market by Android and Apple, investors are passing RIM by, and assigning the stock an ultra-low valuation of just 10.5 times earnings (and about 11.4 times free cash flow.) This despite the fact that, as Hudson points out, RIM remains "a worldwide leader of wireless devices" and that "the International market continues to represent an area of growth for RIM and now accounts for the bulk of its revenue." Hudson predicts that RIM will post something on the order of 37% revenue growth in Q4 2011, and over the longer term, most analysts believe we will see RIM's earnings grow at roughly 20% per year, each year, over the next half-decade.

Foolish takeaway
With a market cap well north of $30 billion, I find rumors of a Cisco (or was it Microsoft?) -led buyout of RIM difficult to swallow. I think either company would choke on an acquisition of such size. But that's not the point.

The point is that somehow, for some reason, investors seem to have suspended disbelief in the speed that RIM is able to grow all on its lonesome. Despite 20% being the clear consensus among analysts, investors are simply refusing to pay up for that growth. I think that's a mistake ... but I don't mind. To the contrary, I thank my lucky stars for such willful ignorance -- because without it, RIM would be much, much more expensive to buy today.