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." 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 tell you only what the analysts said. We also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our 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 ...
Investors in Motley Fool Rule Breakers pick Intuitive Surgical (Nasdaq: ISRG  ) got a special gift yesterday, when Leerink Swann initiated coverage of a raft of new med-tech companies -- and included Intuitive Surgical among them. Sadly, however, the Boston-based biotech bull's "outperform" rating failed to move the stock (unless you count moving it down). Wonder why that is? So did I.

The ratings
Leerink initiated coverage on 11 other companies as well. Here's how they stack up in the analyst's estimation, contrasted  with what investors on CAPS think:

 

Leerink
Thinks

CAPS Says
(5 max):

Trailing
P/E

Expected
5-Year
Growth

Stryker (NYSE: SYK  )

Outperform

*****

24.6

17.9%

St. Jude Medical (NYSE: STJ  )

Outperform

*****

23.9

15.0%

Medtronic (NYSE: MDT  )

Outperform

****

26.2

13.7%

Covidien 

Outperform

****

N/M

4.9%

Intuitive Surgical

Outperform

****

66.6

36.4%

Abbott Labs

Outperform

****

22.0

11.4%

Baxter International

Outperform

***

23.3

13.8%

Johnson & Johnson
(NYSE: JNJ  )

Market Perform

*****

16.0

8.1%

Hospira

Market Perform

****

27.7

11.6%

Zimmer Holdings
(NYSE: ZMH  )

Market Perform

****

20.5

12.2%

C. R. Bard 

Market Perform

****

24.2

14.0%

Boston Scientific
(NYSE: BSX  )

Market Perform

***

N/M

18.3%

Sources: Press release, Yahoo! Finance, and CAPS. N/M = not meaningful.

So Leerink's ratings basically align with those of investors at-large on the upside. Most of what we like, they like, including Intuitive Surgical. Where CAPS players differ with Leerink is on its "market perform" calls -- which investors expect to perform fully as well as the analyst's faves (Boston Scientific excepted).

The reasoning
Why the shotgun treatment? Why is Leerink initiating coverage on so many stocks at once?

According to the Centers for Disease Control and Prevention, the number of Americans aged 65 and older will double, to 70 million, by 2030. Similar trends hold true in other Western countries, and developing nations such as China and India could spike demand for medical products and services even faster as their incomes grow. So, broadly speaking, Leerink thinks that what it calls "large-cap medtech" revenues will grow 8% to 10% per year over the next several years, with earnings growing even faster.

To me, the premise seems sound. And I can't help but notice that with the sole exceptions of Covidien and J&J, the stocks Leerink picked yesterday all share the virtue of being projected to grow faster than the broader "large-cap medtech" market.

But here's the thing: I still don't like these picks. Fast-growers they may be -- Intuitive Surgical in particular (36%? Wow!) -- but not fast enough to justify the share prices. Stryker appears to be the cheapest of the lot, and even it carries a pricey 1.4 PEG ratio.

Not all analysts are fools. Some are Fools
And it's not just me saying that, either. In a story describing Leerink's shotgun-blast initiations, fellow medical-market hawk BMO Capital Markets observed: "The year started out with a bang for medtech investors as the group was a safe haven, but multiple concerns have dampened returns." In other words, BMO agrees with me that this sector looks a mite pricey.

Foolish takeaway
Why should you ignore Leerink's bullish prognosis and listen to BMO instead? Here's why: Leerink guesses right on its stock picks only about 46% of the time; BMO sports a significantly better 58% record for accuracy. And while Leerink boasts a respectable rating on CAPS, BMO is literally one of "Wall Street's Best."

Given my druthers, I'd bet on the better performer. It's even better if the better is "best."

That said, there's still the little matter of Intuitive Surgical's endorsement from Motley Fool Rule Breakers to consider. Do the hypergrowth investors there know something Rich doesn't? Take a free trial to the service and find out.

Fool contributor Rich Smith does not own shares of any company named above. J&J is an Income Investor recommendation. You can find Rich on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 2,713 of more than 110,000 players. The Fool has a disclosure policy.


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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 June 24, 2008, at 2:39 PM, Megagem wrote:

    Your comment "Wow 36% growth" compared to P/E of 66 is not only very sarcstic but grossly misleading

    Please compare growth with forward P/E of 39.38 (ie like with like ) then the PEG is less than 1. In my book a reasonable valuation

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