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This Just In: More 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." While the pinstripe-and-wingtip crowd is entitled to its opinions, we've got some pretty sharp stock pickers down here on Main Street, too. (And we're not always impressed with how Wall Street does its job.)

Given this, perhaps we shouldn't be giving virtual ink to "news" of analyst upgrades and downgrades. And we wouldn't -- if that were all we were doing. Fortunately, in "This Just In," we don't simply tell you what the analysts said. We also show you whether they know what they're talking about.

Today, we're going to take a look at three high-profile ratings moves on Wall Street: shiny new upgrades for Level 3 Communications (NYSE: LVLT  ) and Vivus (Nasdaq: VVUS  ) , offset by a downgrade for Human Genome Sciences (Nasdaq: HGSI  ) . Let's dive right in.

Level 3 -- going up?
It's not ordinarily considered a compliment when someone calls you "overweight," but Level 3 shareholders don't seem to mind. This morning, an upgrade to this rating from Morgan Stanley helped lift Level 3 more than 10% in today's trading session. Morgan's analyst highlighted "accelerating revenue," "margin expansion," and "controlled capital spending" for setting a price target 48% above yesterday's close.

Granted, Morgan Stanley isn't the only analyst singing Level 3's praises these days. This month, I profiled a similar endorsement for Level 3 out of investment banker Cowen & Co. Problem is, the buy thesis Cowen put forward -- that Level 3's EBITDA ratio was starting to look attractive -- was more replete with holes than your average wedge of Swiss cheese. In fact, at 13.5 times EV/EBITDA, Level 3 looks nearly twice as expensive as it was back in September, when ace investor DA Davidson said Level 3 decided the valuation required downgrading the stock.

So could there be anything else causing this aggressive upgrade? Perhaps. Over on Barron's, word has it this morning that private equity is looking to make a big acquisition in the telecom equipment sector. Alcatel-Lucent (NYSE: ALU  ) is named as one potential target. Could be that Level 3's name is getting bandied about somewhere as well. Then again, at an enterprise value of just 3.3 times EV/EBITDA, there's some logic to an Alcatel acquisition. But Level 3 at 13.5 times EBITDA? Not so much.

Vivus lives it up
In contrast, there's definitely more than rumors behind the amazing 89% spike in share price at Vivus this morning. The biotech pioneer just won an endorsement from the FDA advisory panel for its Qnexa anti-obesity drug, sparking twin upgrades to "outperform" from Rodman & Renshaw and Leerink Swann.

Leerink tells us to expect "significant" sales from Qnexa as early as Q3 of this year. Furthermore -- and shades of Alcatel/Level 3 here -- Leerink muses that Vivus just became "an attractive asset" for any potential acquirer looking to "leverage its primary care salesforce." But even absent a buyout, getting Qnexa to market will be a big step forward for Vivus, giving it something it currently lacks (revenues) and potentially something else (profits.)

I'm less optimistic about the sympathetic price spike at Arena Pharmaceuticals (Nasdaq: ARNA  ) , however. Seems to me that if Arena gets past the FDA, selling its rival diet drug, lorcaserin, just got a good deal harder now that Vivus is on a path to get to market first.

It's not easy being Human Genome Sciences
Finally -- and with apologies for ending on a down note -- we come to Human Genome. The biotech's due out with fourth-quarter earnings Monday, and it is expected to report a $0.42-per-share loss. Analyst Collins Stewart isn't waiting around for the bad news, pulling its buy rating on HGSI this morning.

Can you blame them? Human Genome has already lost two-thirds of its market cap over the past 52 weeks. In fact, if I were to fault CS at all for its decision to downgrade, I'd only say it should have happened sooner. We actually covered this one just last month, you see, on the occasion of Maxim Group's buy rating. At the time, rumor had it that Human-G might itself be an acquisition target... but with cash burning fast and debt piled high, time's running out. I think Collins Stewart's late, but right, to be calling it a day on this one and cutting its losses.

Whose advice should you take -- mine, or that of Morgan Stanley, Leerink Swann, Collins Stewart, and other analysts with two names? Check out my track record on Motley Fool CAPS, and compare it to theirs. Decide for yourself whom to believe.

And if you're looking for a real cut-rate price in cutting edge health care, check out the Fool's new report on the industry, "Discover the Next Rule-Breaking Multibagger." The report's free for the clicking, right here.

Fool contributor Rich Smith does not own shares of, nor is he short, any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 388 out of more than 180,000 members. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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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 February 23, 2012, at 4:08 PM, jpeter24 wrote:

    One thing you may be overlooking with Lorcaserin and Qnexa, is that the FDA could very well set forth a condition on Qnexa that it run a pre-approval cardiovascular outcomes trial, that would push back the date of approval. If they rule that a post-approval study is acceptable, then you are correct in assuming Qnexa gets the jump on Lorcaserin.

    However, because the risks associated with Lorcaserin are not cardiovascular in nature, if the FDA decides to approve both, it could very well be that Lorcaserin is the first to market, since Qnexa may have one final study to prove its safety.

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