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." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
Aeternal sunshine of the spotless mind
Considering how badly the rest of the markets fared yesterday, I suppose Aeterna Zentaris (Nasdaq: AEZS ) shouldn't scorn the 3% gain it received. Still, I understand if any A-Z investors are upset that the stock didn't move any higher -- especially since an analyst said yesterday that its shares are worth twice what they now sell for.
Oppenheimer initiated coverage on A-Z at "outperform" yesterday. According to Oppy, the company's perifosine cancer drug is in phase 3 clinical trials now at Keryx Biopharmaceuticals (Nasdaq: KERX ) , and looking good. The analyst thinks a successful launch of the drug will benefit A-Z more than Keryx, and Fools seem to agree. On CAPS, Keryx gets only three stars from our CAPS community, while A-Z gets all five. Oppenheimer's pretty sure that A-Z shares will sell for $5.50 a share within 12 months -- a 134% profit.
But I wouldn't bet on that.
Biotech bumbling
Oppenheimer spends most of its time covering biotech stocks; over the last five years, it's made 66 recommendations in the industry. But so far, only 43% of its picks are beating the market. To date, Oppy's managed to underperform the S&P 500 by a combined 273 percentage points across its field of five-dozen-odd picks.
Even a handful of multi-bagger winners like Ariad Pharmaceuticals (Nasdaq: ARIA ) haven't been enough to offset the damage done by Oppy's losing bets on the likes of the following:
|
Company
|
Oppenheimer Rating
|
CAPS Rating
(out of 5)
|
Oppenheimer's Picks Beating S&P by
|
| Biogen Idec (Nasdaq: BIIB ) |
Underperform |
*** |
44 points |
| Celgene (Nasdaq: CELG ) |
Outperform |
**** |
51 points |
| Ligand Pharmaceuticals (Nasdaq: LGND ) |
Outperform |
**** |
78 points |
Considering how poorly Oppenheimer's done at picking winners in the past, what are the chances it's right about Aeterna Zentaris today?
It's hard to say. Lacking a crystal ball, it's never easy to value a profitless biotech start-up like A-Z. But judging from Oppenheimer's record, this analyst is having trouble even calling it right on profitable biotechs. (Biogen Idec, Celgene, and Ligand have each passed that hurdle.) I'm exceedingly leery of this side of the market, and probably won't spend a penny on A-Z stock until it's firmly profitable and free cash flow positive -- and, in fairness, 99% of its potential profit has already been made.
A few words for the rest of you
Other Fools may be more willing to rush in at an earlier stage, however, and I salute your courage. Without you, and your boundless, heedless willingness to toss of bags of cash at these kinds of start-ups, many cancer drugs might never get invented. So for you, a few words of encouragement:
While I cannot say for certain that A-Z will be profitable for you, or even ever earn a profit for itself, I can say that a review of the firm's cash flow statement suggests that it's not going away anytime soon. A-Z has well over $40 million cash in the bank and minimal debt, and it's burning cash at the modest rate of just $20 million per year. This suggests the company's got at least two years of life left in it. Fellow Fool Sean Williams looked at the company recently as well, and came away similarly convinced of the company's firm financial footing. Whatever else you need to worry about at Aeterna Zentaris, the risk of stock dilution does not appear to be a worthy concern.
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