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 track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.
And speaking of the worst ...
Shares of the profitless wonder that is Human Genome Sciences (Nasdaq: HGSI ) are flying today, rising nearly 3%. And before you think this is some kind of "April Fools'" joke, it's not. A couple of Wall Street's finest joined hands to weigh in in Human G's favor this morning, both rating the stock a "buy," and positing per-share prices of $37 and $35.
Details on the upgrades are sketchy at present, but here's what we know: Both Collins Stewart and Jesup & Lamont initiated coverage this morning, with the former going so far as to declare the stock a "core holding in the mid-cap biotech space." Unfortunately for Human Genome shareholders, though, that's not all we know ...
Let's go to the tape
Nearly four years of close study of these analysts' records demonstrate that -- how do I put this gently? -- Nobel prize laureates in the field of biotech stock picking, they ain't.
To the contrary, Collins has to-date racked up a record of only 38% accuracy in the Biotech space, stumbling from disaster to disaster:
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Companies
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Collins Said:
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CAPS Says:
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Collins' Picks Lagging S&P by:
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Savient Pharmaceuticals
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Outperform
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**
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6 points
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Genzyme (Nasdaq: GENZ )
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Outperform
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****
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37 points
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Isis Pharmaceuticals
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Outperform
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****
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40 points
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Meanwhile, Jesup has almost no experience in the biotech field, although it does have a record in the adjacent industry of Healthcare Equipment and Supplies (a bad record, with 38% accuracy mirroring Collins' reputation in biotech.)
A coupla April fools
Now, I don't mean to be too hard on these bankers. Fact is, both Collins and Jesup have had their share of successes. For example, Jesup's bullish call on FedEx (NYSE: FDX ) last year has worked out admirably, more than doubling in a little over 12 months. For its part, Collins boasts a near-triple in the form of Quicksilver Resources (NYSE: KWK ) , which it recommended buying late in '08. All I mean to say is that while these analysts may do quite well in many sectors, biotech is sadly not one of them ... and of course, this does not bode well for today's Human Genome recommendations.
They may be right, I may be crazy
Now I admit that there's at least some method to the analysts' madness. Just a few months ago, Human Genome and best buddy GlaxoSmithKline (NYSE: GSK ) announced that their Benlysta lupus treatment had successfully passed its phase 3 trial. And of course, the closer this drug gets to approval (and to going on sale ... and to generating revenues ... and profits), the better for Human G.
But here's the thing: Take the more conservative of the analyst projections -- Jesup's putative $35 price target on Human G. With more than 185 million shares outstanding, Jesup appears to be valuing the company at $6.6 billion. But with Human G currently boasting just $276 million in revenues, this suggests the analyst believes the company is worth nearly 24 times its current annual sales.
Valuation matters
That's crazy on its face, of course. And clearly, both Jesup and Collins are betting Benlysta will turn into a success story that will lift Human G's revenues higher. But how much higher must they rise to make $35 a reasonable price to pay for the stock? By way of comparison, big-time drugmakers like Amgen (Nasdaq: AMGN ) and Merck (NYSE: MRK ) regularly retail for four times sales. (Of course, Amgen and Merck also earn profit margins orders of magnitude higher than Human G's on these sales.)
Still, if you believe Benlysta (and the rest of Human Genome's drug portfolio) will create something on the order of $1.6 billion in annual sales for the company, and if you believe furthermore that reaching "scale" production of such drugs will boost Human Genome's profit margins into the double-digit range of its rivals, well, then I suppose it's possible that the analysts' price targets are fair.
Foolish takeaway
Personally, that's about two "ifs" too many for my taste. But on April Fools' Day, far be it from me to challenge a foolish recommendation. So go crazy, investors. But take a good hard look at Human Genome Sciences -- after all, it's only money. You can always make more.
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