This Just In: Upgrades and Downgrades

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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 track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

And speaking of the worst ...
What do you do when you learn that one of the stocks you own has just been downgraded by a famous Wall Street analyst? If you're like me, your first reaction is probably to panic -- somebody, somewhere, knows something you don't! But if you're also like me, then the next thing you do is find out who issued the downgrade, then click on over to Motley Fool CAPS and find out if they know what they're talking about.

Which is one reason why I'm not worried by yesterday's downgrade on Intuitive Surgical (Nasdaq: ISRG).

On Tuesday, as you probably know by now, San Franciscan investment banker JMP Securities slashed its rating on the robotic surgeon to "market perform." Now, we don't know why JMP has gone suddenly cold on the stock -- not a single major media outlet has details on the downgrade. What we do know, though, is that when JMP speaks, people ... probably shouldn't listen.

The bad ...
Over the two years that we've been tracking JMP here on CAPS, we've watched this analyst develop a record of rare mediocrity. Nearly 55% of the time this banker tells you a stock will outperform or underperform the market, it doesn't do anything of the sort. You don't have to look far to find examples of JMP's mistakes in the medical sphere:

Stock	JMP Says	CAPS Says	JMP's Pick Lagging S&P By
Dendreon (Nasdaq: DNDN)	Underperform	**	271 points (today's jump really hurts)
Viropharma (Nasdaq: VPHM)	Outperform	*****	29 points
Sequenom (Nasdaq: SQNM)	Outperform	***	16 points

The good ...
On the other hand ... we're talking surgical robots here, right? So in all fairness, I should point out that from time to time, JMP does in fact call a pick right both in biotech -- and in hi-tech:

Stock	JMP Says	CAPS Says	JMP's Pick Beating S&P By
Myriad Genetics (Nasdaq: MYGN)	Outperform	***	158 points
Cisco Systems (Nasdaq: CSCO)	Outperform	****	25 points
Celgene (Nasdaq: CELG)	Outperform	****	22 points

... and the ugly
That said, I should also point out the most relevant JMP pick of them all -- its April 2008 upgrade of Intuitive Surgical to "market outperform." Wanna guess how that one went?

Yep. Even after the stock's remarkable 40% run-up over the past few weeks, JMP still managed to find a way to lose money on Intuitive. By the time it closed out its position yesterday, that pick was lagging the market by 22 points.

Ouch!
Yep, it took rare talent indeed to lose money on Intuitive. And yet -- and don't faint from shock when I tell you this -- the simple fact of the matter is that I believe JMP is finally right this time.

Listen, JMP was clearly off its rocker when it predicted last April that Intuitive would command an 80 P/E and sell for $400 a share within the year. I said so then (and I was right), just as I also said the stock looked bargain-priced four months ago when I put the thumbs up in CAPS (and so far, I've been right again). But now that the stock's run up past $140, it's time to count your winnings, or cut your losses (as JMP is doing).

Why? Because based on its most recent results, Intuitive's free cash flow for the last 12 months has amounted to $246 million. This gives the stock a 21.4 price-to-free cash flow ratio (meaning that it's cheaper than its 27.2 P/E makes it seem). Relative to 21% analyst-expected average five-year growth, this price seems reasonable -- but it's no longer a bargain.

Foolish takeaway
Based on its current valuation, I fully expect Intuitive to hold onto its gains -- it's earned them. Therefore, JMP's downgrade to the equivalent of a "hold" rating seems logical to me. However, in order for Intuitive Surgical to outperform the market from here, it's going to have to beat all expectations for future growth.

My advice? Hope for it, but don't bet on it.