This Just In: More Upgrades and Downgrades

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, they're talking biotech, as ace investor Stifel Nicolaus launches coverage of seven stocks -- most of them small caps, and most of them unprofitable. It's quite a hazardous sector to invest in, and quite the collection Stifel has given us to sort through, but are any of these little gems actually diamonds in the rough? Let's find out.

Biotech bargains, or busts?
We'll start off by taking roll call. Of the seven stocks Stifel started covering this morning, it names four buys: Discovery Labs (Nasdaq: DSCO  ) , Oncothyreon (Nasdaq: ONTY  ) , Threshold Pharma (Nasdaq: THLD  ) , and Puma Biotech (Nasdaq: PBYI  ) .

The analyst also starts coverage on, but does not endorse, three more "hold"-rated stocks: Immunogen (Nasdaq: IMGN  ) , Infinity Pharmaceutical, and Pharmacyclics. Of the seven, only two stocks are currently profitable -- Oncothyreon and Pharmacyclics. Interestingly, even these two aren't expected to remain so for long. According to financial data aggregator finviz.com, all seven of Stifel's picks carry negative forward P/E ratings, meaning even the ones that are profitable today are expected to drop back into the red by next year.

So why would anyone want to own any of these stocks?

Think long-term. Think ground floor.
You might as well ask yourself why anyone would play the lottery. "Investors" in these companies aren't necessarily investing based on the companies' numbers today, or even based on what they expect the numbers to look like a year from now. They're looking farther out, and speculating in hopes of hitting it rich with a big payday. So how far out do we have to look?

Excellent question. Turning to S&P Capital IQ for the answers, we find some clues in consensus analyst guesses as to when the companies are expected to turn profitable, how much they're expected to earn, and -- when factoring in today's stock prices -- how good a bargain they look like based on these very long-term earnings estimates:

Company

Expected to Turn Profitable in...

And to Earn Per-Share Profits of...

Resulting in a Very Forward P/E of...

Oncothyreon 2014 $0.61 8
Threshold 2015 $0.46 17
Discovery Labs 2016 $0.15 18
Immunogen 2016 $0.29 47
Pharmacyclics 2016 $0.72 93
Infinity Not sooner than 2017 * *
Puma Not sooner than 2018 * *

*Your guess is as good as theirs.

It's all so clear to me now!
So what can we glean from all this data? Far from casually tossing strands of stock-spaghetti against the wall and wondering which will stick, Stifel seems to be taking a methodical approach to its speculative-stock-picking. Based on what we can see above, I think three things are evident:

  • Three of Stifel's four buy ratings -- Oncothyreon, Threshold, and Discover Labs -- are also the three stocks expected to turn a profit earliest, and confirm the analyst's bullishness soonest.
  • They're also, incidentally, the three cheapest stocks relative to expected future earnings. (Albeit, these earnings could disappoint).
  • Meanwhile, Stifel reserves its fourth and final buy rating for Puma, a stock that no one seems to know when it will turn profitable (if ever). A stock that's indeed expected to still be losing money five years from now. A stock that, with so many expectations left entirely up to speculation, carries the greatest chance of being mispriced at its current valuation of $14.75 a share.

Foolish final thought
Now personally, I'm no fan of wild-eyed speculation. If you ask me, most investors are better off, and will enjoy greater profits, from investing in shares of rock-solid dividend stocks, such as the nine companies we recently profiled in our free report on generous dividend payers. (Read it here). Investors with a more adventurous streak to them, however, are free to do otherwise. It's not just all crazy talk. There actually is a method to Stifel's madness. And some day, somehow, a few of these stocks just might succeed.

Fool contributor Rich Smith does not own shares of, nor is he short, any stock named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 265 out of more than 180,000 members. The Fool has a disclosure policy.

Motley Fool newsletter services have recommended buying shares of ImmunoGen.

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


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