This Just In: 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." 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.

Focus on 3-D
For investors in the burgeoning industry of three-dimensional "printing," it's the eternal question: Should you buy shares of eponymous stock 3D Systems (NYSE: DDD  ) , or of upstart rival Stratasys (Nasdaq: SSYS  ) ? On the one hand, 3D just introduced a new product -- a "VIDAR DiagnosticPRO Edge" scanner that supposedly "doubles scanning speed for enhanced productivity" in 3-D manufacturing. On the other hand, though, Stratasys hasn't exactly been sitting on its hands, either. The company just finished reporting a blockbuster earnings quarter, and upped its earnings guidance for the rest of the year. Which to choose... which to choose?

Yesterday, investment banker Piper Jaffray shrugged and made a modest suggestion: "Why not just buy them both?"

When in doubt, punt
Upgrading both 3D and Stratasys to "outperform," the analyst slapped a $76 price target on Stratasys, and imprinted a $55 target to 3D. Problem is, no one seems to know why. While most mainstream news outlets agree that the upgrades happened, I've yet to see any details on precisely why Piper thinks these two stocks will outperform the market.

That's a crucial question because, as even the stocks' fans must acknowledge, shares of both these stocks look pretty pricey. Buy a piece of 3D, for example, and it will cost you a steep 62 times trailing earnings. Meanwhile, a share of Stratasys will set you back a good 77 times earnings.

I mean, sure, both stocks are growing quickly. Analysts predict 3D will see 14% annual earnings growth over the next five years. Meanwhile, Stratasys' alliance with Hewlett-Packard (NYSE: HPQ  ) appears to be helping the smaller company outgrow its rival; analysts put Stratasys' growth rate at 15%. But, while certainly respectable, neither of these growth rates comes anywhere near justifying the nosebleed P/E ratios we're seeing. But could Piper be seeing something the rest of us aren't?

Paying Piper its due
I suppose it's possible. After all, ranked in the top 20% of investors we track on CAPS, Piper Jaffray is arguably one of the better analysts out there today. Problem is, that may not be saying much. On average, most analysts actually underperform the S&P 500 on their stock recommendations. And as it turns out, Piper -- although better than average -- also gets more picks wrong than right.

According to our CAPS records, only about 47% of this banker's stock recommendations actually succeed in exceeding the performance of a plain vanilla S&P 500 index fund. Worse, when it comes to picking "Machinery" stocks, such as 3D and Stratasys, Piper's record of "success" actually declines to just 36% accuracy.

Which you have to admit, bodes poorly for the prospects of its new 3D and Stratasys picks.

Foolish takeaway
Numbers don't lie, Fools. Piper's record of poor performance in the machinery industry is a bright red flag, waving you away from pretty much any stock the analyst says it likes. Not that you needed the warning, in this case. When a stock's selling for upwards of 60 times earnings, but showing a growth rate barely into the double digits, that's a warning siren, too, and it sounds loud and clear: "Don't buy."

With the U.S. relying on the rest of the world for such a large percentage of our goods, many investors are ready for the end of the "made in China" era. Stratasys and 3D Systems may be part of that shift. In our new report on "3 Stocks to Own for the New Industrial Revolution," we'll tell you how to profit from this seismic shift in manufacturing -- and what prices you should be willing to pay to own a piece of the action. 


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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 November 14, 2012, at 3:37 PM, rvn0 wrote:

    I did! I bought them both! For once I did the right thing. It was such an indecision that I couldn't choose one over the other and so far both have been profitable.

  • Report this Comment On November 15, 2012, at 7:32 AM, ingr72 wrote:

    Why not own both ... I like that thinking as long as they are companies that are in an industry without many players and both seem to be Best of Breed...

    I originally bought DDD about 18 months ago then added SSYS a few months later as I saw both were moving in tandem ... I did the same in our Roth Accts for me and my wife a few years back when I bought T and VZ ... Didn't know which might be better, though I favored T because my wife works for T ...

    When in doubt ... sometimes buying a small piece of each can work for you ...

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