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 ...
On a generally "up" day for Wall Street, Motley Fool Stock Advisor recommendation Quality Systems
None of my usual sources for background on analyst ratings tells us why UBS removed its "buy" rating and placed the shares in "neutral." But considering just how well Quality Systems is doing, it seems logical that the rating and the run-up were connected. With the stock up 24% in less than two months since UBS issued its buy rating in June (as the S&P 500 lost 2%), I suspect UBS just decided to take some time off to count its winnings. But is this banker making a mistake, putting a successful investment back on the shelf?
Let's go to the tape
For clues to UBS's skill at "calling the tops" on stocks, we turn once again to Motley Fool CAPS for a glimpse at the analyst's record. What we find is that UBS boasts a CAPS player rating in the top 5% of investors, along with a respectable record of 54% accuracy on its picks.
In the medical field in particular (where dwells Quality Systems):
Company |
UBS Said: |
(5 max): |
UBS's Pick Beating S&P by: |
---|---|---|---|
Mindray Medical |
Outperform |
***** |
63 points |
Genentech |
Outperform |
**** |
38 points |
Teva Pharmaceutical |
Outperform |
***** |
38 points |
But even a good analyst can have a bad day. UBS's bad days cropped up when it picked:
Company |
UBS Said: |
(5 max): |
UBS's Pick Lagging S&P by: |
---|---|---|---|
Sun Microsystems |
Outperform |
*** |
46 points |
WellPoint |
Outperform |
**** |
24 points |
AIG |
Outperform |
** |
22 points |
Quality, yes. But value?
As for Thursday's downgrade of Quality Systems in particular, I have to side with UBS on this one. Quality Systems is indeed a "hold." Here's why:
At first, the company's lofty P/E ratio of 26 might make it look like a "sell." Analysts' projected 20% growth rate just isn't high enough to support that valuation. But dig deeper into Quality Systems' cash flow statement, and you'll see that the company sports a more reasonable price-to-free cash flow ratio of 23. The stock's selling at only a slight premium to what I'd ordinarily want to pay, and let's face it: In the 21st century, electronic medical records are just bound to trump tree pulp and typeface. Quality Systems is going to keep on growing, and probably faster than the rest of the economy.
Foolish takeaway
Still, considering that the stock is now trading around a quick estimate of fair value, and that the company just put a new guy in the CEO's chair (albeit he's not new to Quality Systems), I don't see anything wrong with taking a breather here, seeing how the new management works out, and perhaps waiting for a market slump to give us a better price for buying more.
But do the folks at Stock Advisor agree? Take a free trial to find out.