Today's 3 Picks: MS, PALM, HOG

Shares of Morgan Stanley (MS) surged Monday after a weekend report in The Wall Street Journal said it was in talks to buy a majority stake in Citigroup's (C) brokerage unit, Smith Barney. The report added that Citi's board would vote on the deal today.

If such a deal goes through, Smith Barney’s 11,000 brokers would join Morgan Stanley’s 8,000 to create the world’s largest retail brokerage. It would also displace Bank of America (BAC), from the top spot, which it assumed last autumn when it bought Merrill Lynch.

Neither company would comment on the proposed deal, which could see Morgan Stanley paying capital-hungry Citi as much as $2 billion to $3 billion for a 51% stake, with an option to buy the rest of the joint venture over five years, according to the Journal.

Lauren Smith, an analyst at Keefe, Bruyette & Woods, wrote Monday that a completed deal would offer mutual benefits for both financial houses. Citi would boost its capital levels, while Morgan Stanley would be able to grow its retail deposit base and gain access to lower risk brokerage business, helping to lessen its dependence on riskier ventures.

However, as financial services analyst Richard Bove at Ladenburg Thalmann wrote Saturday, the lack of detail about the deal makes it difficult to evaluate.

“It is unclear what Smith Barney consists of at the present time,” he wrote, noting that Citigroup combined Smith Barney's sales force with its private client group.

Bove thinks it's highly likely that James Gorman, a co-president of Morgan Stanley, would become leader of the joint venture, which could boost his chances of succeeding current CEO John Mack.

The combined revenues of the two wealth management units’ last four quarters would be about $18 billion, according to published reports.

Bottom Line: Buy
Investors with a high risk tolerance could see Morgan Stanley's shares head even higher if the deal goes through.

Palm (PALM) shares rose Monday as investors and tech pundits alike continued to applaud the successful unveiling of its Pre smartphone at the annual Consumer Electronics Show in Las Vegas last week.

The long-awaited device, which is backed by a new operating system, received largely positive reviews from tech critics and Wall Street analysts.

However, there are still some big questions that remain unanswered about the Pre. Not only is the device a ways off from hitting the market, but it has yet to be given a price point. Such lack of detail leaves the Street wondering whether the Pre will be able to compete with Apple's (AAPL) iPhone. Another what-if: The Pre will initially run solely on the network of beleaguered wireless carrier, Sprint Nextel.

Some analysts seem optimistic, however. Morgan Joseph analyst Ilya Grozofsky upgraded Palm's stock to Buy from Hold in a Monday report, joining Deutsche Bank, Citigroup and Global Crown Capital in boosting ratings. Grozofsky said the continued backing of private equity firm Elevation Partners bolstered his confidence in Palm. (Elevation recently invested another $100 million into the Sunnyvale, Calif.-based company.)

“As a result of our enthusiasm for Pre and belief that near-term structural issues have been put to bed, we are upgrading the stock to a Buy,” he wrote. “We also believe near term cash issues are put to bed and no longer threaten Palm's long-term viability.”

Peter Misek, an analyst with Canccord Adams, called Pre “an OK device, but not the home run that Palm needs.” His Friday note said the Sprint pairing put Palm at “a major disadvantage” due to the carrier's market share losses to Verizon Communications (VZ) and AT&T (T).

“In conclusion, we suspect that the likes of Verizon, Vodafone (VOD) and AT&T had an opportunity to carry the device out of the gate and passed – an ominous sign in our view,” he wrote.

Bottom Line: Hold
Investors who held on as Palm’s value plummeted by nearly 80% last year, will probably want to wait for another wave of market enthusiasm when the Pre actually hits the market. As a short-term play, this might be a good chance to take profits.

Shares of Harley Davidson (HOG) skidded Monday after Goldman Sachs (GS) downgraded the shares of the high-end motorcycle maker to Sell.

"We still see considerable downside as the dual impact of unprecedented headwinds in global luxury motorcycle demand and credit have yet to be fully digested by the shares, in our view," wrote Goldman analyst Patrick Archambault.

That should come as little surprise. At the end of last month market research firm Channel Checkers surveyed motorcycle dealers and said 58% of them reported a drop in business from the year before.

While Milwaukee-based Harley Davidson isn’t in the same dire shape as the Big Three auto makers, it may take some time before sales gain momentum again.

Harley recently made some key management changes, announcing the retirement of CEO Jim Ziemer last month and the resignation of financial services unit chief Sy Naqvi last week. The changes won't stop there, however.

“Investors could have to take some pretty tough medicine, including meaningful production cuts, possible restructuring and maybe even a cut to the dividend," RBC analyst Edward Aaron wrote Monday.

Bottom Line: Hold
Investors who've hung onto these shares since the beginning of 2007 have received a bad case of road rash. Anyone caught in this crash has little choice but to hang on unless they want to sell into serious weakness.