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A private equity firm said it is not looking to unload its large stake in



, refuting a report by an analyst this week that suggested the struggling handset maker would be in need of cash if that were to occur.

Despite what should be taken as good news, Palm shares were down nearly 9% Tuesday to $2.04. However, it's not a mystery why shares of the device maker continue to trade near five-year lows. Global Capital Crown analyst Pablo Perez-Fernandez believes it's time for investors to be asking tough questions about Palm.

In a report released Monday, Perez-Fernandez said that a new round of layoffs by the company, as well as a regulatory filing saying it would sell any of a number of securities, including preferred shares, hinted that Elevation Partners, the private investment firm co-founded by music icon Bono, may be giving up on Palm.

"This would be consistent with the declining share price and our belief that

handsets with the Nova operating system will not be available until late in 2009, clearly missing Palm's self-imposed first half 2009 deadline," Perez-Fernandez wrote in his research note.

In October 2007, Elevation Partners took a 27% stake in Palm in exchange for a $325 million investment in order to allow the company to "invest in products and operational expertise so that Palm could participate fully in the growth opportunity of smartphones," according to Roger McNamee, managing director and co-founder of Elevation Partners.

Late Monday, Elevation Partners moved to assuage those concerns, issuing a statement saying it had no intentions of divesting its stake in Palm. "We have a very long-term investment horizon and have no plans to exit our investment in Palm," McNamee said in the release. "Elevation supports Palm in taking the difficult but necessary steps required to migrate from legacy products."

Moving away from those legacy lines might be the easiest of the steps Palm has to take, and the investment from Elevation certainly isn't helping. Before Elevation's investment, Palm had over $625 million in cash and no debt. Palm promptly secured $400 in new debt and gave away $940 million in a one-time dividend in order to engineer Elevation's cash infusion.

Perez-Fernandez says he would like to know whose idea it was to take on $400 million in debt to pay out such a large, one-time dividend so that Elevation's $325 million investment would equal roughly one-quarter of Palm.

"The company has a negative $140 million net cash position ($256 million in cash, restricted cash and short-term investments), and it could burn at least $80 million to $100 million over the next four quarters, by our estimates," writes Perez-Fernandez. "On top of everything, this is happening at a time when raising capital seems next to impossible."

It has also been a struggle for Palm and its Centro and Treo product lines to keep up with new smartphones from


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. Apple has the advantage of its wildly popular iPhone 3G, $25 billion in cash and no debt. RIM has shipped 11 million BlackBerry smartphones in the last two quarters and it continues to unveil new versions of its signature product, with the 3G Bold and the touch-screen Storm launching recently on


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, respectively.

Palm, on the other hand, has yet to release its new Treo Pro in the U.S. During the company's fiscal first-quarter conference call in September, CEO Ed Colligan said Palm plans to release an unlocked version of the device in the U.S. before it would roll out carrier-supported versions.

"Palm has reportedly been unable to launch the Treo Pro with any U.S. carriers," says Perez-Fernandez. "We had been hearing for a few months that Palm would start selling the Treo Pro through AT&T and


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before the end of the year, but we are now hearing that neither carrier is likely to carry the phone this year. That would be a terrible blow to Palm."

Sprint and AT&T said it was company policy not to discuss devices that have not yet been scheduled for release.

UBS analyst Maynard Um says that while there could be upcoming catalysts for Palm, including a U.S. carrier announcement for the Treo Pro and the unveiling of the new Nova operating system, it will be tough for the company to sustain any momentum.

"Until then, we expect competition/market to remain challenging," he writes in a research note.

As competition from RIM and Apple has increased, Palm has been forced to slash its workforce. The company recently said it would cut staff but declined to say how many of its more than 1,000 workers would lose their job.

With the job cuts looming and no new device set to launch during the holiday season, Perez-Fernandez recommends rotating out of Palm, which he has an underweight rating on, and into RIM or


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, both of which he ranks as overweight.

Um has a similar rating for Palm, recommending investors sell the stock. Um says that companies he has spoken to, those still purchasing handhelds, indicated that they believed the winding down of Palm's handheld business could be coming. "Given the non-core nature of this segment, we believe Palm's eventual exit from this business is logical," he writes.

Of course, that's little help to shareholders that have seen shares of Palm plummet 77% from their 52-week high.