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 did.

But in "This Just In," we don't tell you only what the analysts said. We'll show you if 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 worst and sorriest, too.

And speaking of the worst ...
Two Wall Street firms chimed in simultaneously on Motley Fool Rule Breakers pick Intuitive Surgical (Nasdaq: ISRG) yesterday, helping to drive the stock up to nearly a new 52-week high (but the stock is down today with the rest of the market).

Both analysts praise the company for its strong performance selling da Vinci surgical robots to hospitals -- and for its razor-and-blades business model, which makes Intuitive the sole provider of "high-margin disposable tools" used by the da Vincis after they're installed.

That's the good news. The bad news would be that the two analysts in question are JMP Securities and Lazard Capital -- and at the risk of overstatement, they're two of the worst-performing analysts in CAPS.

Let's go to the tape
Reviewing their records on CAPS, we find both stock shops placing in the bottom 20% of investors, with JMP guessing right on just 36% of its picks, and Lazard scoring a bit better with 43% accuracy. Both firms focus intensively on the medical sphere, with varying degrees of success:

JMP Securities

Company	JMP Said:	CAPS Says (5 max):	JMP's Pick Beating (Lagging) S&P by:
Gilead Sciences (Nasdaq: GILD)	Outperform	*****	52 points
Vertex Pharma (Nasdaq: VRTX)	Outperform	****	28 points
Cardinal Health (NYSE: CAH)	Outperform	****	(19 points)

Lazard Capital

Company	Lazard Said:	CAPS Says (5 max):	Lazard's Pick Beating (Lagging) S&P by:
Medtronic (NYSE: MDT)	Outperform	*****	6 points
Hansen Medical (Nasdaq: HNSN)	Outperform	****	(3 points)
Genentech (NYSE: DNA)	Outperform	****	(7 points)

All of which paints a confusing picture of two analysts who are sometimes wrong, sometimes right, and sometimes right to an astonishing degree (Gilead has served both analysts very well indeed).

Whether they'll be proven right on Intuitive Surgical, or whether they've boarded a train going the wrong way, will be known in time. Right now, I'm extremely concerned that both analysts are urging their clients to take on excessive risk, and with little regard for valuation.

To my mind, the key to evaluating these buy ratings is the fact that both analysts agree Intuitive will earn about $5 and change this year -- $5.10 says Lazard; JMP thinks $5.15. Yet the price targets the analysts posit for these earnings -- $420 for Lazard, $400 for JMP -- imply forward P/E ratios hovering around 80.

Foolish takeaway
A P/E of 80 for a stock that most analysts agree will grow at something short of 40% per year going forward?

Don't get me wrong. Intuitive is a great company and a great investment. It's returned an average of better than 400% profit each of the three times we've recommended it to members of Motley Fool Rule Breakers. And the prospect of 40% growth going forward is also great guns, but it's not enough to justify a P/E within spitting distance of triple digits. That's not investing, folks. That's madness.