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, Wall Street is talking up the prospects for Geron (Nasdaq: GERN  ) and VMware (NYSE: VMW  ) , but talking down MAKO Surgical (Nasdaq: MAKO  ) . Let's find out why.

Make a run for the exits
Might as well get the bad news out of the way first: This morning, MAKO Surgical suffered another downgrade, this time at the hands of Dougherty & Co.

As the analyst points out, MAKO bounced hard after bottoming at $12 earlier this month. It's close to $17 a share now already, and once it hits $18 will be "fully valued." While "still believers in the long-term potential of the RIO System and the MAKOplasty solution," StreetInsider.com notes that the analyst still wants to see "consistent and sustainable execution (read: solid execution beyond just one quarter)." Until that happens, Dougherty says it can recommend no more than a neutral rating.

I agree. The bounceback in stock price notwithstanding, MAKO's business remains very much in doubt. No profits this year. No profits expected next year, either. No profits, in fact, expected in any year before 2015 -- and piles of cash burning everywhere you look. On the one hand, true, a speculative stock like this one can always go higher... but it could turn around and go right back down, too. Until MAKO starts making some numbers that permit us to give it a reasonable valuation, neutrality seems the right stance to take.

(And if MAKO does start hitting those numbers, what then? Find out in our special, premium research report on MAKO Surgical -- right here.)

Geron lives! (?)
Speaking of stocks with no numbers that lend themselves to optimism, yet are generating optimism on Wall Street, we turn now to Geron. Analysts at Stifel Nicolaus just initiated coverage of the former stem-cell star with a buy rating and a $4 price target. But it's hard to see why this stock would interest anyone other than pure-play momentum investors.

Over the past 30 days, Geron shares have rocketed 50% (80% since the turn of the year). Positive puffing from articles on SeekingAlpha.com appear to be contributing to the run. Yet even though Geron's now out of the stem cell business, Geron's numbers still very much resemble those of a stem cell researcher: $66 million in cash burnt over the past 12 months and $88 million in GAAP losses.

For that matter, Geron even makes MAKO look good. While analysts hope to see profits at MAKO three years from now, at Geron it's nothing but losses forecast out as far as the eye can see. In short, Stifel may see a future in this biotech. But unless you can see farther out than 2016, a year in which most folks still see Geron posting losses, then you're probably better off leaving this stock alone.

Hope for VMware?
But fear not, dear Fool. It's not all bad news. One analyst has made a pick today that might actually make sense. The analyst: Longbow Research. The stock: VMware.

This morning, Longbow initiated the EMC (NYSE: EMC  ) subsidiary with a buy rating and a $110 price target. If Longbow's on the mark, that works out to about a 23% profit from today's price levels. But is it right?

I admit, at first glance this looks like a pretty strange pick for a value investor like me to be endorsing. At 50 times earnings, VMware looks twice as expensive as its parent (a company I've previously endorsed as a bargain stock, given its P/E of 22). But here's the thing: P/E doesn't tell the whole story here. You have to look at the cash flow, and you have to look at the balance sheet.

You see, unlike any of the biotech mo-mo stocks discussed up above, VMware generated positive free cash flow last year -- $1.9 billion of the stuff. That's roughly 145% more free cash than the company claimed to be "earning" under GAAP. Since this cash tends to pile up over time, VMware now has about $4.9 billion amassed, net of debt. As a result, the company's enterprise value-to-free-cash-flow ratio now stands at a mere 17.8 -- which is actually cheaper than the P/E ratio at EMC.

Result: Weighed against the company's 23% projected long-term growth rate, VMware looks very much like a bargain stock, P/E notwithstanding.

Looking to uncover more bargains, at prices that other folks may not realize are cheap? Discover the joy of investing in our new free report: "Middle-Class Millionaire-Makers: 3 Stocks Wall Street's Too Rich to Notice."

Whose advice should you take -- mine, or that of "professional" analysts like Dougherty, Stifel, and Longbow? Check out my track record on Motley Fool CAPS, and compare it to theirs. Decide for yourself whom to believe.

Fool contributor Rich Smith does not own (or short) shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 259 out of more than 180,000 members. The Fool has a disclosure policy.

The Motley Fool owns shares of EMC, VMware, and MAKO Surgical. Motley Fool newsletter services have recommended buying shares of MAKO Surgical and VMware.

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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