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This Just In: Upgrades and Downgrades

By Rich Smith – Updated Apr 5, 2017 at 7:40PM

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UBS spanks the software sector.

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'll be tracking the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

And speaking of the best ...
You wouldn't know it from their stock prices, but some of America's best-known software companies got taken to the woodshed this morning -- and star stock picker UBS gave 'em a good thrashing:

  • Adobe (NASDAQ:ADBE)? Sell.
  • Intuit (NASDAQ:INTU): Sell.
  • Symantec (NASDAQ:SYMC)? Sell that one, too.
  • And Salesforce.com (NYSE:CRM): We know we told you to buy that one before, but sell it as well.

Not to put too fine a point on it, but if you own a U.S. software company today, UBS hates your stock. Why? The economy, for one thing. That, and the fact that the incredible shrinking dollar, long a boon for U.S.-based companies as they translated foreign earnings into more and more dollars here at home, is turning against us. The more the dollar reinflates, the more euros, yen, and renminbi U.S. firms must earn just to keep their earnings even with last year -- and the worse sales and earnings growth will look by comparison.

All of which adds up to one conclusion in UBS's mind: U.S. software makers will earn "materially" less than we think in H2 2008 and 2009. In recognition of which, UBS says it has lowered its estimates "on virtually every company in our coverage universe both for the remainder of 2008 as well as for 2009." As of this writing, UBS really only likes three software shops:

Company

UBS Said:

CAPS Says:

UBS Pick Beating (Lagging) S&P by:

Oracle (NASDAQ:ORCL)

Outperform

****

27 points

Microsoft (NASDAQ:MSFT)

Outperform

***

14 points

Novell (NASDAQ:NOVL)

Outperform

**

(1 points)

So what?
Really. So what if UBS hates your stocks? Should you care?

Sure, UBS is one of the biggest names on Wall Street. But its record as tracked by CAPS shows us that UBS "ain't all that." (Plus, what does it really mean to be "one of the biggest names on Wall Street" anymore? There's only, like, four or five banks still standing up there.)

According to our records, UBS only gets about 48% of its stock picks right. And the more I look at its shopping list today, the more I'm convinced UBS is getting it wrong again. I basically agree with UBS that Intuit is too expensive today, and Adobe no bargain. However, with its clean balance sheet, Symantec looks reasonable. Symantec carries a price-to-free cash flow of less than 10, with 12% growth projected over the long term.

Sure, UBS could be right that those growth rates are over-optimistic. But that doesn't explain why the analyst still likes Novell, Oracle, or Microsoft -- none of which boast growth-rate projections superior to their P/FCF ratios. Furthermore, if UBS is going to go and cut growth expectations across the board, I don't see how it can keep these three on its buy list while skipping over Symantec. Lower growth at any of Novell, Oracle, or Microsoft will push them into "hold" or even "sell" territory, in my book.

Foolish takeaway
Don't be swayed by the "big name" behind today's downgrades, Fools. Regardless of whether UBS is right about growth slowing as the economy turns over to recession, your best bet remains investing in stocks with reasonable valuations and strong growth prospects. Out of the seven stocks named today, that means Symantec. 

Fool contributor Rich Smith does not own shares of any company named above. Microsoft is an Inside Value pick. You can find Rich on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 589 out of more than 115,000 players. The Fool has a disclosure policy.

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Stocks Mentioned

Salesforce, Inc. Stock Quote
Salesforce, Inc.
CRM
$150.17 (0.86%) $1.28
Microsoft Corporation Stock Quote
Microsoft Corporation
MSFT
$241.07 (1.97%) $4.66
NortonLifeLock Inc. Stock Quote
NortonLifeLock Inc.
NLOK
$20.95 (2.10%) $0.43
Oracle Corporation Stock Quote
Oracle Corporation
ORCL
$63.07 (1.04%) $0.65
Intuit Inc. Stock Quote
Intuit Inc.
INTU
$409.29 (2.13%) $8.52
Adobe Inc. Stock Quote
Adobe Inc.
ADBE
$281.40 (1.38%) $3.83

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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