This Just In: Stratasys, Ltd. Wins a "Buy" Rating (but Should You Care?)

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." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.

But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our supercomputer tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

And speaking of the best...
Precisely one month ago today, analysts at Bank of America/Merrill Lynch sounded the alarm on 3D Systems Corporation's (NYSE: DDD  ) growth rate. Warning that 2014 will be the start of a long slide for the company's profitability, and that further revenue gains will depend largely on the company's willingness to overpay for acquisitions, Merrill in effect declared "everybody out of the pool," and advised investors to sell the stock. The stock is down 26% since...

And one month later, it's happening again.

This morning, analysts at Merill's fellow megabanker, JPMorgan, paired an endorsement of 3D-rival Stratasys (NASDAQ: SSYS  ) with a repeated warning about 3D Systems itself, saying the stock "still looks richly valued" even after the past one-month 26% drop in 3D's share price.

In stark contrast, JP argues that "growth prospects for SSYS and the broader 3-D printing/additive manufacturing space remain compelling," and that Stratasys is a "best-in-class pure-play and therefore a core holding for tech growth investors." Although Stratasys has suffered nearly as much as 3D itself from the flight from "additive manufacturing" stocks, falling 21%, and although JP thinks Stratasys will only recover about 17 of these percentage points over the course of the next 12 months (rising to $125), the analyst nonetheless argues that while 3D Systems should be "avoided," Stratasys is a stock to "buy."

But is JP Morgan right?

Let's go to the tape
Possibly not. You see, while Merrill Lynch boasts a sterling record for making smart stock picks (better than 54% accuracy on its recommendations over the past eight years and an average outperformance-of-the-market of 20 points per pick), JPMorgan's record is a bit iffier.

Here at Motley Fool CAPS, we've been tracking JP's performance for about as long as we have Merrill Lynch's, you see. But what we've discovered is that while Merrill gets the majority of its stock picks right, JP actually gets most of its recommendations (50.3%, to be precise) wrong. This year alone, for example, JP has picked such poor performers as:

 

JPMorgan Said

CAPS Says

JPMorgan's Picks Lagging S&P by

Intel

Outperform

****

4 points

Autodesk

Outperform

****

7 points

Canadian Solar

Outperform

**

16 points

And in contrast to Merrill Lynch, which had a couple of past positive picks for 3D Systems and Stratasys under its belt when it made its negative forecast last month, JPMorgan has literally no record of success in three-dimensional printing stocks to argue that it knows what it's talking about when saying 3D Systems is overvalued, but Stratasys isn't.

Go ahead. Scan the 1,441 stock recommendations that we have on file for JP over the past eight years. You won't see 3D or Stratasys mentioned even once.

Distinctions without differences
This lack of a track record in 3D is especially troubling, given the advice JPMorgan is peddling today.

To hear JP tell it, investors should avoid 3D Systems because it is "richly valued" at 126 times earnings. And I agree. The stock is clearly overpriced -- but we already knew that from Merrill Lynch.

But in fact, the recent popularity of the 3-dimensional printing sector has left most such stocks trading for prices that can be called "richly valued." Valued on sales, for example (because not all of these stocks are profitable enough to have useful P/E ratios), JPMorgan favorite Stratasys sells for a 10.8 multiple. That's cheaper than the 11.4 price-to-sales ratio at 3D Systems, true. It's cheaper than the 13.2 P/S at ExOne (NASDAQ: XONE  ) , and much cheaper than the 21 multiple that new IPO Voxeljet (NYSE: VJET  ) carries.

But it's not "cheap." And given JPMorgan's lack of a record in this industry, I'd think twice before listening to its advice, and assuming Stratasys is cheap enough to buy.

America's plan to take the crown back from China
For the first time since the early days of this country, we're in a position to dominate the global manufacturing landscape thanks to a single, revolutionary technology: 3-D printing. Although this sounds like something out of a science fiction novel, the success of 3-D printing is already a foregone conclusion to many manufacturers around the world. The trick now is to identify the companies -- and thereby the stocks -- that will prevail in the battle for market share. To see the three companies that are currently positioned to do so, simply download our invaluable free report on the topic by clicking here now.


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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 March 24, 2014, at 9:23 PM, wildeweasel wrote:

    You realize that 54% right and 50.3% wrong are both as statistically relevant as flipping a coin right? neither is worth basing your investment portfolio on or reacting to. The only reason for even paying attention to them is to make some short term plays with options, even then you still have to understand your companies and a little bit of psychology.

  • Report this Comment On March 25, 2014, at 12:24 AM, TMFDitty wrote:

    You'd think so, but it's much, much harder than it sounds. Try making 100 picks yourself on caps.fool.com. Come back to me in a year and tell me how you did.

  • Report this Comment On March 26, 2014, at 2:05 PM, wildeweasel wrote:

    I didn't say it was easy, just that it was irrelevant. The bigger question is how much would you have made by following all of the buy and sell ratings?

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