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." Here, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
And speaking of the best ...
It's never easy losing a friend, and last week, Research In Motion
Technically, the downgrade was from "buy" to "underperform," but you get the point. Jefferies isn't nearly so keen on the stock as it once was. Four months after predicting RIM would "go to $80," the analyst now thinks the stock's worth a piddling $35 a share, according to StreetInsider.com
Quoting liberally from Jefferies' report, the site notes that "checks indicate RIMM will see continued execution issues, product delays, and lackluster product launches for the next year. We believe Blackberry OS 7.0 (renamed, formerly 6.1) and QNX will be delayed and that carriers are withdrawing support." As fellow Fool Anders Bylund pointed out back in December, QNX was basically the reason Jefferies upgraded RIM in the first place.
Let's go to the tape
Is now really the right time to be selling RIM? After all, Jefferies doesn't exactly boast a record of stock-picking brilliance on its past Communications Equipment recommendations.
If RIM falls as Jefferies predicts, it won't be the first time this analyst has guessed right ... after first guessing wrong. In fact, over the years it's turned into a bit of a pattern for the banker:
- In April 2009, Jefferies tagged Nokia
to outperform ... then one year later, to underperform. (NYSE: NOK)
- Conversely, the banker was down on Alcatel-Lucent
in 2008, only to turn suddenly optimistic in October of last year. (NYSE: ALU)
In each case, the abrupt change of course proved profitable for investors. The analyst was able to turn initially disastrous underperformances, relative to the S&P 500, into net-net gains by correcting its mistakes.
Will history repeat?
Call me a pessimist, but I fear there's a very real chance that Jefferies' third time might be just as charmed. You see, like Jefferies, I penned a bullish note on RIM myself just six weeks ago, citing the company's cheap price among other enticements. Now trading at less than 8 times earnings, RIM shares cost less than those of most any rival you could name.
After the sell-off, they still do. Both Apple
Of course, what really attracted me to RIM was the company's consistently strong free cash flow, relative to reported earnings. And in its report last week, RIM claimed that it had earned $3.4 billion in GAAP income over the past 12 months -- but generated free cash flow of only $3 billion.
What to do now?
Things certainly look grim for RIM today. Free cash flow is waning. Analysts just trimmed growth forecasts from the 20% expected only days ago, to the 16.5% annual growth rate that they now think more likely. The stock's in the dumps, and taking its lumps from analysts. Now certainly feels like a good time to follow Jefferies' lead and throw in the towel ... but I won't.
When I see a name-brand stock like Research In Motion selling for less than eight times what it earns in a year, I just cannot dislike it. To me, the stock continues to look like a value. I just hope it's not a value trap.