This Just In: More Upgrades and Downgrades

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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." Today, 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 ...
Christmas came a few weeks early for stock shoppers this week, when Brit banker Barclays Capital put together a wish list covering 20 of the hottest names in software and generously told us which ones to buy, and which ones ... not.

Now granted, 20 names is quite a bit of material to try to cover in a single column. So I'll tell you straight out: I'm not going to go into a huge amount of detail on each and every one of these recommendations today. That said, we have room enough to at least give you a few highlights. And as the weeks and months progress, and Barclays tweaks its thinking on the stocks it's now begun covering, we can fill in the details as necessary.

Barclays' best ideas
Taking a bullish bent on software, Barclays initiated 13 of its 20 new recommendations with "overweight" ratings. Further slicing and dicing the data, the analyst then proceeded to name four of these 13 buys as its "top" picks. And the winners are:

Company

P/E

Growth Rate

Free Cash Flow as a % of Net Income

Parametric2918%60%
Citrix Systems (NAS: CTXS) 4119%169%
VMware (NYS: VMW) 6527%233%
salesforce.com (NYS: CRM) 8,221 (yes, seriously)26%2,829% (yes, also seriously)

Sources: Yahoo! Finance, S&P Capital IQ.

So clearly, price is no object for Barclays when shopping for software stocks. This analyst is gunning for growth, valuation be darned. But what separates these top picks from the rest of Barclays' buys?

Company

P/E

Growth Rate

Free Cash Flow as a % of Net Income

Oracle (NAS: ORCL) 1814%136%
SAP2013%126%
Intuit2614%157%
Informatica (NAS: INFA) 4720%149%
Ariba9422%143%
LogMeIn12218%376%
Qlik Tech (NAS: QLIK) 37839%105%
Cornerstone OnDemandNM43%NM*
NetSuiteNM33%NM*

Sources: Yahoo Finance, S&P Capital IQ.
*Unprofitable under GAAP, Cornerstone and NetSuite do in fact generate positive free cash flow -- $1.1 million for Cornerstone, $19.9 million for NetSuite.

Once again, we're presented with a list chock-full of pricey stocks and only slightly less aggressive growth targets. Judging from the numbers, there's very little difference separating Barclays' most favorite software stocks in the whole wide world and the ones it merely likes a whole, whole lot.

Each of them seems somewhere from modestly to immodestly overpriced on a P/E basis. Each is demonstrating fast growth. And typically for the software industry, where capital-spending requirements are low, each boasts strong free cash flow -- much stronger than its P/E would suggest. I dare say these attributes also helped win Autodesk and Oracle spots in the Motley Fool Pro portfolio and attracted the interest of Motley Fool Stock Advisorto Teradata and Tibco. (Conversely, a high P/E ratio has never been an obstacle to recommendation by Motley Fool Rule Breakers, which has endorsed both Qlik and Informatica.)

Honorable mention
But what about the rest of Barclays' new software recommendations? In addition to the names Barclays says you should buy, the analyst also ran down a list of seven stocks too pricey to invest in today but worth keeping an eye on. These "equalweight" equities include names both well known (Autodesk, Microsoft, and Symantex) and a few perhaps a bit less well known (DealerTrak, Taleo, Teradata, and TIBCO Software). Curiously, while Microsoft and Symantec are relative laggards in this race at growth rates of 10% or thereabouts, once again, we find most of the names attracting Barclays' interest -- but not its endorsement -- sport strong double-digit growth rates and superior free cash flow. Same as the buy recommendations, in other words. Same as the "top picks."

Foolish takeaway
What's a Fool to make of this hodgepodge list of fast-growing, cash-generating, but by and large overpriced stocks that Barclays has gifted us? I find most of the stocks overly expensive, and I've no intention of following Barclays' advice and buying any of them today. That said, it's worth pointing out that in the world of stock investing, Barclays has a proven record of picking winners and ranks in the top 10% of investors we track on CAPS.

My advice, therefore, would be to take Barclays' wish list and keep it close at hand -- consider using it as your own personal stock-shopping list, and consult it next time you see a sell-off. Meanwhile, make use of Barclays' research to find "derivative" stock ideas that are buyable today. For example, VMware may look expensive, but EMC (NYS: EMC) , which owns a big chunk of VMware stock, is not. At 21 times earnings but just 11.5 times free cash flow, the stock looks bargain-priced for its 17% projected growth rate. If it were up to me, I'd buy that one first of all and put the rest of Barclays' ideas on a shelf.

In fact, look here. I'll put my reputation where my mouth is and publicly recommend EMC in my own CAPS portfolio today. If you're not sure how good my advice is now, feel free to follow along and compare how my recommendation compares with the performance of Barclays' stable of software picks. May the best investor win.

Not quite ready to gamble on a bunch of go-go software stocks? Can't say as I blame you. Why not try a few steady-Eddy dividend payers instead? Read the Fool's new, and free, report on13 High-Yielding Stocks to Buy Today.

At the time this article was published Fool contributorRich Smithdoes not own (or short) shares of any company named above. You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 342 out of more than 180,000 members.The Motley Fool owns shares of Microsoft, Qlik Technologies, Oracle, and Autodesk.Motley Fool newsletter serviceshave recommended buying shares of VMware, Qlik Technologies, salesforce.com, Teradata, Informatica, TIBCO Software, and Microsoft.Motley Fool newsletter serviceshave recommended creating a bull call spread position in Microsoft.Motley Fool newsletter serviceshave recommended shorting salesforce.com.We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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