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 tool for rating stocks and analysts alike. With CAPS, we'll be tracking the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.
And speaking of the best ...
In the midst of a miserable market, investors in Motley Fool Rule Breakers pick Hansen Medical (Nasdaq: HNSN ) received a rare bit of good news yesterday, as an analyst initiated coverage of their stock with a "buy" rating. And it didn't come from some washed-up, subpar hack either. This time, it was star stock picker Brean Murray coming to Hansen's defense and backing up its rating with a record of outperforming nine out of 10 investors tracked by CAPS.
But speaking of hacks ...
As you may recall, a somewhat less than stellar analyst, Needham & Co., downgraded shares of another Motley Fool medical fave, Motley Fool Hidden Gems pick Natus Medical (Nasdaq: BABY ) , last month. Back then, Needham worried that hospitals were cutting capital spending to weather the and that the cutbacks would constrict revenues at Natus.
But although not disagreeing with Needham's major thesis, Brean thinks the risks of a slowdown have been blown sufficiently out of proportion to create a buying opportunity at Hansen Medical. Notes Brean: "Hansen's stock has retreated significantly on fears of a slowdown in capital expenditure spending in the health care sector" -- significantly enough, in fact, that Brean's ready to try to call a bottom on this one.
Let's go to the tape
But just how good is Brean at picking its entry price? Specifically, it's better than 92% of the investors we track on CAPS, and it's made some outstanding calls in the past:
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Company
|
Brean Murray Said:
|
CAPS Says (Out of 5):
|
Brean Murray's Pick Beating S&P by:
|
|
Elan (NYSE: ELN )
|
Underperform
|
***
|
52 points
|
|
Mindray Medical (NYSE: MR )
|
Outperform
|
*****
|
15 points
|
|
American Oriental Bioengineering
|
Outperform
|
*****
|
9 points
|
That said, Brean's accuracy rating does leave something to be desired -- the analyst gets only about 52% of its picks right. Within the medical sphere, here are a few of its losers:
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Company
|
Brean Murray Said:
|
CAPS Says:
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Brean Murray's Pick Lagging S&P by:
|
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Medis Technologies
(Nasdaq: MDTL )
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Outperform
|
*
|
63 points
|
|
Dendreon (Nasdaq: DNDN )
|
Underperform
|
**
|
32 points
|
|
China Medical Technologies
|
Outperform
|
*****
|
7 points
|
Strangely, Brean Murray doesn't seem to have rated Intuitive Surgical (Nasdaq: ISRG ) -- an absolute supernova stock, not to mention the one that leads many investors to discover Hansen, considering that the same team of medical robotics pioneers founded both companies.
Stranger still is Brean's rationale for buying Hansen now. Brean tells us that Hansen "offers an attractive entry point in light of what will likely be a solid third quarter and a long-term trajectory and market opportunity that remains intact." That sounds logical, but I wonder just what numbers Brean is basing its conclusions on:
- It's not trailing GAAP profits -- Hansen doesn't have any of those.
- Nor free cash flow. Hansen is burning cash at a prodigious pace.
- Nor does it seem likely that Brean is valuing the company based on future earnings -- at least not the immediate future. Most analysts expect Hansen to lose money this year, and again next year, and again the year after that. In fact, the consensus seems to be that this company won't turn a profit until 2011 at the earliest.
The only number I see that Brean could be hanging its hat on today is the price-to-sales ratio -- and even that's a stretch. Hansen does at least have sales under its belt, if no profits thereon. Its price-to-sales ratio is sitting just north of 11, just a bit higher than Intuitive Surgical's ratio of 10.
Foolish takeaway
So there's some logic to Brean's buy rating, but, in my view, not enough of it. If I'm going to pay 11 times sales, I'll feel a whole lot more comfortable owning a company with positive earnings, like Intuitive Surgical, than one not expected to earn a penny for three years.
So if you must own a rocket stock in the medical sphere, take a close look at Intuitive Surgical. As for Hansen, put that one on the shelf and let it age a while.
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