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 ...
Geron (Nasdaq: GERN ) investors have endured-slash-enjoyed a wild ride this year. Their stock exploded with January's news that the FDA had cleared the company's GRNOPC1 "hESC-based therapeutic candidate" for use in a human clinical trial to treat patients with acute spinal cord injuries. Fast forward a few months, however, and the stock imploded on August's news that the selfsame FDA was suspending clinical trials of the treatment. And now they can thank Wall Street banker Merriman Curhan Ford for their latest upward swing.
Merriman thinks Geron could as much as double off today's price, primarily in response to successful data on GRN163L, a treatment that targets cancer agent telomerase "through direct inhibition and through an immunotherapy (vaccine) approach." Reports Merriman, GRN163L is currently undergoing "multiple clinical trials and represents a promising new cancer therapeutic." Oh, and incidental to GRN163L, Merriman notes that: "Geron also is poised to be a key leader in the embryonic stem cell arena." Put these two facts in a centrifuge and set it on high -- the result that spins out is a "buy," says Merriman.
Is this spinner a winner?
I'm not so sure. Investing in profitless biotechs like Geron is always a hi-stakes endeavour, and one practically guaranteed to fill a portfolio with as many big losers and big winners -- as Merriman's record shows:
|
Stock
|
Merriman Says
|
CAPS Says
|
Merriman's Picks Beating
(Lagging) S&P by
|
|
Pharmasset
|
Outperform
|
**
|
54 points
|
|
Abraxis BioScience
|
Outperform
|
***
|
32 points
|
|
American Oriental Bioengineering
(NYSE: AOB )
|
Outperform
|
*****
|
(37 points)
|
|
Elan
(NYSE: ELN )
|
Outperform
|
****
|
(55 points)
|
The key, of course, is to try and find a few more winners than losers -- and to win big on the former. And the problem is that Merriman doesn't seem particularly good at that. Over the course of the three years we've been tracking this analyst's performance, Merriman has racked up a record of sub-38% accuracy on its biotech predictions. Worse still, the sum total of its advice has been more than 550 percentage points worth of market underperformance across its picks in this sector. Far from "beating the market," the average Merriman recommendation lags it significantly.
Triangulating Geron
Will Geron fall into the former group or the latter? Obviously, Merriman has high hopes for the stock -- and it's not alone. This little company has big friends in the form of:
- Corning (NYSE: GLW ) , which teamed up with Geron last month to announce the development of a new "synthetic surface matrix" for use in growing embryonic stem cells.
- Geron also inked an exclusive licensing agreement with General Electric's (NYSE: GE ) medical subsidiary to capitalize on the firm's stem cell research.
As for my thoughts ... well, here at the Fool I spend more time focusing on defense contractors that go "boom" than on gauging the chances of health care shops going bust. All I can really tell you about Geron is that while I see the same prospects for profit that Merriman sees, I also see the company burning $44 million a year in pursuit of those prospects. And because I'm not a hug fan of buying companies with substantially negative free cash flow -- I'd stay away from this one.
Foolish takeaway
But make no mistake, the prospects are there. If you absolutely, positively must invest in stem cells, Fool biotech writer Brian Orelli suggests you focus not on the start-ups, but on established players like Pfizer (NYSE: PFE ) and GlaxoSmithKline (NYSE: GSK ) -- companies with the smarts to know which therapies hold promise, and the money to buy 'em out when the prove their worth.
So if I were looking for a way to play stem cells, that's the way I'd go: Bet big, lose small.
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