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.
Beware: Here be dragons
Dell (NAS: DELL) shareholders suffered a sucker punch this morning, after the company admitted that its expected 5% to 9% sales growth for 2012 now looked closer to between 1% and 5%. Within minutes, Dell's disappointing news drove BMO Capital to downgrade Hewlett-Packard (NYS: HPQ) , too, ahead of its earnings report tomorrow.
Let's go to the tape
When calling the computer industry's fortunes, few analysts have a better track record than BMO. We've been following its performance in Motley Fool CAPS for several years now, and according to our data, this analyst ranks among the top 10% of investors we track.
Within the computers and peripherals industry, it's particularly proficient, outperforming the market on about 57% of the recommendations it makes. BMO is even better in the adjacent semiconductors industry, where an astounding 77% of its picks eventually beat the S&P 500. Apple (NAS: AAPL) , Seagate (NYS: STX) , IBM (NYS: IBM) , and Western Digital (NYS: WDC) are just a few of the names on which BMO has built its reputation as one of the savviest stockpickers in tech:
BMO's Picks Beating S&P by
Source: Motley Fool CAPS.
On the other hand, even a superb analyst like BMO trips up sometimes. Fans of Hewlett-Packard may be pleased to learn that two of the mistakes BMO did make in computer hardware involved buy recommendations for ... Dell and Hewlett-Packard. According to our scorecard, BMO is still in the red on both of those picks for these two key PC makers.
So what is BMO saying about HP today? And where might it be getting things wrong? According to the analyst, "the upcoming July quarter earnings announcement will once again cause top-line estimates to move lower ... We think PC results will come in below forecast ... Moreover, we do not think HP can achieve current estimates for HP's October quarter."
Long story short, BMO is predicting that HP will slightly miss its sales projections for the latest quarter, and land below its top-line guess for the following quarter by a lot more. BMO also finds time to dismiss suggestions that HP might sidestep market weakness by selling its PC division to Nokia (NYS: NOK) , Acer, or Lenovo. The analyst argues that Samsung might be interested, but couldn't pay a price that HP would want to accept.
In short, BMO believes that whatever HP tells us tomorrow, it's going to disappoint investors. You should sidestep that car crash and exit the stock now, the analyst argues. I disagree.
HP: Buy the numbers
To understand why, recall this old gem from value investing godfather Benjamin Graham: "In the short run, the market is a voting machine, but in the long run it is a weighing machine." In other words, BMO could be right about bad news from HP tomorrow -- but that won't truly affect the worth of its stock.
How much is HP worth? Right now, the stock sells at a multiple of between seven and eight, whether you use earnings or free cash flow. Even if BMO is right, and HP misses expectations for a quarter or two, that price still isn't much to pay for the 9% long-term growth that analysts expect HP to produce over the next five years. Especially not with HP paying shareholders a 1.5% dividend yield to sweeten the deal.
Act now! This offer expires soon!
My advice: If you're nervous about HP's earnings, take BMO's advice and sidestep the stock before earnings come out tomorrow. The news isn't due out until after Thursday market-close, so you still have a few hours to act.
On the other hand, what if you plan to own your "investments" for months or years, rather than hours? HP doesn't depend as much on enterprise sales as is Dell, so it probably won't suffer as badly. It might even do better than its archrival. If you believe so, I'd urge you to take a deep breath, consider how very cheap HP looks today, and take advantage of the sell-off BMO's downgrade just caused. Then send the analyst a thank-you note for helping you buy HP for 5% less than it cost yesterday.
At the time thisarticle was published The Motley Fool owns shares of Western Digital, International Business Machines, and Apple.Motley Fool newsletter serviceshave recommended buying shares of and creating a bull call spread position on Apple.Fool contributorRich Smithdoes not own (or short) any company named above.You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 443 out of more than 180,000 members. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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