This Just In: 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." 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 ...
Drug investors found their Christmas stockings stuffed two weeks ahead of schedule yesterday when Soleil Securities went back to the health-care well. Handing out "buy" ratings to Sepracor (Nasdaq: SEPR) and Cephalon (Nasdaq: CEPH), Endo Pharm (Nasdaq: ENDP) and Pfizer (NYSE: PFE), Soleil may have single-handedly rescued shareholders of each stock from the market's latest tumble. As the Dow and Nasdaq both fell, Pfizer's stock barely budged yesterday. (Cephalon dropped a little; Endo and Sepracor actually ended the day up a bit.)

Of course, the "upgrade effect" is well known in investing circles. When an analyst says something's going to go up, such prophecy has a tendency to self-fulfill in the short term, regardless of whether the analyst is right or wrong in the longer term -- and regardless of whether the analyst has much of a record to stand on.

Let's go to the tape
Case in point: Soleil. It's not the world's most accurate stock picker -- guessing wrong on its picks more than half the time, including such recent flubs as:

Company	Soleil Said:	Motley Fool CAPS Says:	Soleil's Pick Lagging S&P by:
Alcoa (NYSE: AA)	Outperform	****	35 points
BioMarin Pharmaceutical (Nasdaq: BMRN)	Outperform	****	10 points
Plum Creek Timber (NYSE: PCL)	Outperform	****	4 points

These recent laggards notwithstanding, though, I actually agree with at least one of Soleil's calls yesterday. Like the analyst, I think Pfizer's a buy -- and here's why:

According to Soleil, the risk of "generic competition for Lipitor in November 2011 is well understood and priced into the stock at the current valuation." But Soleil believes that investors are forgetting Pfizer's potential to:

• Use its sizable cash stash for an acquisition.
• Capitalize on its 24 drug candidates currently in phase 3 testing.
• Reward shareholders amply with its monster 7.8% dividend yield.

Oversimplifying Soleil's argument only a little, the analyst believes that Pfizer is poised to pop just as soon as it announces a "significant M&A target," or once its "late-stage pipeline shows advances." The presumption being that either event could allay investor concerns over the future of Lipitor. Meantime, investors can just cash the dividend checks and wait for a catalyst to turn their leaden stock into gold.

Buy the numbers
Now I'll admit -- at first glance, and from a traditional investing perspective, Pfizer carries with it some rather distressing numbers. Sure, the P/E's all right. No one's going to turn their nose up at an 11 times valuation, even in this market. The problem is, if analysts are right, Pfizer lacks the growth prospects to turn that attractive P/E into a respectable PEG ratio. Analysts don't seem to think Pfizer can grow its profits much more than 1% per year, long-term.

But here's the thing: In a topsy-turvy market like we're in right now, earnings growth may not be your best path to profit in any case. Sexy or not, dividends at least provide a steady source of income.

What's more, maybe Pfizer's not growing right now, but from where I sit, it has the wherewithal to keep its 7.8% dividend flowing from here to eternity. Maintaining the dividend at its current rate costs Pfizer $8.6 billion per year. But the company's sitting on $10 billion net cash, and generating about $14 billion more in annual free cash flow. There's actually no reason to think Pfizer will be unable to increase its dividend should it be so inclined.

Foolish takeaway
Growth would be nice, and Pfizer investors will welcome it when and if it comes. Meanwhile, may I have the (dividend) check, please?