This Just In: Upgrades and Downgrades

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 ...
I usually speak of "the best" in a general, forgiving sense -- the same sense, I suspect, that convinces the Wall Street bankers that they are indeed better stock pickers than are the rest of us (despite all evidence to the contrary). Every once in a while, however, one of the firms that truly deserves the title "Wall Street's Best" comes along and publishes a stock recommendation. That happened this morning, when Credit Suisse made the gutsy call to upgrade the stock of biotech Amgen (NASDAQ:AMGN) to "outperform" -- just hours before that company reported earnings.

If Amgen disappoints investors this afternoon, Credit Suisse is going to look pretty silly. But whichever way the earnings report goes, you have to applaud the Swiss for abandoning their usual neutrality. It's the right decision, long-term investing-wise, and here's why: Credit Suisse isn't just looking for a quick "score," upgrading just before earnings. Rather, it's making a logical decision based on real-world events. Specifically, the fact that Amgen won a patent trial yesterday, when rival Roche's Mircera anemia drug was found to violate 11 patents issued for Amgen's Aranesp. The magnitude of the victory, says Credit Suisse, makes it unlikely Roche could successfully appeal the jury's verdict, and makes it correspondingly more likely that Amgen can get Mircera banned from the market, eliminating the only real rival to its Aranesp and Epogen offerings. Looking far down the road, Credit Suisse sees this single verdict adding $0.10 to $0.20 per share in annual profit for Amgen by 2011.

Case closed
It looks like a pretty open-and-shut case that Credit Suisse is making here. But let's go through the motions, and check out the analyst's record just for kicks. Placing sixth in a field of 128 Wall Street players, Credit Suisse boasts a CAPS ratings of 97.68, and calls 59% of its stock guesses correctly.

Superb as that record looks on the surface, if you dig a little deeper, things get real complicated, real fast. Reviewing its active picks in the drug space specifically, here's what we find:

Hmm. So it seems Credit Suisse is less impressive in the drug space -- or is it? Digging deeper still, past the firm's current recommendations, and into our archives of now-closed recommendations, we find Credit Suisse with a record of outperforming the market by 17 points with a recent "underperform" call on Johnson & Johnson (NYSE:JNJ), and another 18 points on an "underperform" rating for ... Amgen!

Foolish takeaway
Credit Suisse is a great stock picker, making a logical decision to upgrade Amgen on yesterday's good litigation news. However, the analyst has a mediocre record recommending winning drug stocks -- a record only salvaged by its uncanny ability to pick drug-stock losers.

From my perspective, Credit Suisse may soon wish it had decided to rate Amgen a loser. With the stock trading for nearly 17 times trailing earnings, but expected to grow its profits at barely more than 10% per year over the next five years, Amgen looks overpriced. Maybe Credit Suisse is right about the extra profits Amgen could earn from its court-validated drugs. But honestly, $0.10 per share in added profit, five years from now, looks pretty anemic. It does not justify the upgrade.