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." 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.

Imperial who?
Today's featured rating comes courtesy of a virtual unknown in investor circles. Neither best nor worst, Los Angeles-based Imperial Capital has no rating whatsoever on CAPS -- a result of the investment banker's failure to report its ratings to for public review. It's perhaps because of this shortcoming that when investors heard Imperial had begun covering cancer researcher Dendreon (Nasdaq: DNDN  ) with an "underperform" rating yesterday, they responded by bidding the shares up 12%.

But was that the right call? Should investors have given short shrift to Imperial's concerns? I'm not so sure. As I mentioned last month, Imperial is far from the first analyst to express concerns about Dendreon's business. Ace analyst William Blair, for one, recently argued that the company's prospects dimmed in comparison to those of firms further along in the blockbuster-drug business, such as Sanofi (NYSE: SNY  ) and Johnson & Johnson (NYSE: JNJ  ) . Indeed, surveying the field, Blair saw better chances for investors to make a profit on even lower-profile stocks, like Medivation (Nasdaq: MDVN  ) and OncoGenex, than on Dendreon.

Why? Well, let's take a look.

Dendreon: By the numbers
Dendreon management says it needs to make about $500 million in annual Provenge sales in order to break even. The problem is, the company's not even halfway there yet. It's currently on track to do only $215 million in business this year, and its current estimated run rate of $240 million will fall far short of the $800 million run rate it had previously set as a target by the end of 2011.

True, the consensus of analysts who follow the stock is that Dendreon will ramp to $384 million or so in sales next year, and top the $560 million mark in 2013. But if sales fall shy of the $384 million mark next year, it would likely postpone the date when Dendreon hits cash flow breakeven beyond 2013 -- disappointing investors who've been relying on Wall Street's promises yet again, and probably doing little good for the stock price.

Valuation matters
Speaking of price, it's hard to value a stock on P/E in the absence of profits. However, based on its revenues, Dendreon is selling for roughly 11 times trailing annual sales today. That's about 50% higher than the average valuation on stocks in the biotech sector. It's also about three times the valuation of biotechs like Gilead Sciences (Nasdaq: GILD  ) and Amgen (Nasdaq: AMGN  ) -- both of which are already earning profits.

While I certainly hope Dendreon is able to overcome its difficulties, the reality is this: Investors have a whole host of profitable alternatives to choose from in the biotech industry. Given Dendreon's tenuous present condition, and the unreliability of analyst estimates of how much it will earn (or even sell) in the future, there doesn't seem much reason for an investor to prefer Dendreon over the alternatives.

Disagree? Think Dendreon will regain its former glory? Add it to your Fool Watchlist, and read along as it tries.

Fool contributor Rich Smith does not own shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 267 out of more than 180,000 members. The Motley Fool has a disclosure policy.

The Motley Fool owns shares of Johnson & Johnson and Dendreon. Motley Fool newsletter services have recommended buying shares of Johnson & Johnson and Gilead Sciences, as well as creating a diagonal call position in Johnson & Johnson.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Read/Post Comments (5) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 05, 2011, at 3:46 PM, BSDetector wrote:

    Invest in salt and sauce. You'll be eating your words in five weeks.

  • Report this Comment On October 05, 2011, at 4:27 PM, countrarian wrote:

    Can the author kindly tell us his track record on Dendreon, and why he has been consistently bearish in the stock? A simple search of "Rich Smith" and Dendreon will bring up his history commenting on the stock. Thank you in advance for responding to your readers as to any reason or possible vested interest you or any associates may have on this particular topic.

  • Report this Comment On October 05, 2011, at 5:12 PM, TMFDitty wrote:

    @BSDetector: Disagree. But props for a clever comment.

    @countrarian: Because ... I was right? I'm at a loss as to why you think being bearish on a stock before, during, and after it collapsed might be a bad thing.

    As for "vested interests," we're required to disclose all of those at the end of each article. Scroll back up, and you'll see I have no positions whatsoever in any stocks discussed in the article.

    Foolish best,


  • Report this Comment On October 05, 2011, at 7:37 PM, countrarian wrote:

    TMFDItty, thanks for the response I was merely going from some of your the older articles, to wit:

    Your article of Feb 2nd 2010

    "Educated ignorance

    Will Dendreon discover the silver bullet that cures cancer forevermore, or MannKind eliminate the scourge of diabetes? Will Geron gift mankind with the secret of eternal life? Maybe they will, and maybe they won't. But agnostic as I am on their prospects, I'm convinced to the point of certainty of one thing:

    You won't make a profit on it if they do."

    The Price at close that day: 29.75

    That was followed shortly thereafter with your article "5 Stocks That Just wont Quit" which also expressed negative sentiment.

    There were literally hundreds of trading days after that article was written to make a nice profit.

    I don't want to come across as a paranoid pumper but rather a prudent investor. Given the history of DNDN and allegations of serious manipulation, (and even the price and option action the last couple of weeks) I hope you can appreciate my concern.

    Thank you again in advance.

  • Report this Comment On October 06, 2011, at 10:40 AM, TMFDitty wrote:

    @countrarian: I think you just illustrated why I almost never short stocks myself: "The market can remain irrational longer than [I] can remain solvent." Just because a Fool is right does not mean the market will immediately agree with him.



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