This Just In: More 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." While the pinstripe-and-wingtip crowd is entitled to its opinions, we've got some pretty sharp stock pickers down here on Main Street, too. And we're not always impressed with how Wall Street does its job.

So perhaps we  shouldn't be giving virtual ink to "news" of analyst upgrades and downgrades. And we wouldn't -- if that were all we were doing. Fortunately, in "This Just In," we don't simply tell you what the analysts said. We also show you whether they know what they're talking about.

A big o' buy out of Little Rock
When the Food and Drug Administration proved the optimists right and agreed with its advisory panel's decision to approve MELA Sciences' (Nasdaq: MELA  ) MelaFind skin-cancer detector last week, investors yawned. Maybe it was because, as my fellow Fool Brian Orelli suggested, they thought approval was a foregone conclusion. Maybe it was because -- as Brian also proposed -- they know there's a big difference between having a product for sale and getting customers to buy it.

Not every start-up medical-equipment manufacturer will grow up to be Medtronic (NYSE: MDT  ) , after all. And success stories such as Intuitive Surgical (Nasdaq: ISRG  ) are few and far between. Then again, not every investor doubts MELA's ability to imitate the great success stories in this industry, either.

Yesterday, one such investor stepped up and laid its reputation on the line in support of MELA's chances. On Tuesday, tiny Little Rock, Ark., investment banker Stephens initiated coverage of the stock. And not only did Stephens tell investors to buy it -- but it also climbed way out on a limb and predicted that within a year, this little $5-a-share company will double and fetch $10 per stub.

But he's got high hopes. He's got high hopes ...
On a generally green day for the market yesterday, Stephens' buy-rec on MELA did precious little to move the stock, which actually dropped by a few pennies. And it's true -- even with FDA approval in the bag, the stock continues to look like something of a long shot.

After a decade in business, MELA has delivered little to its investors other than steadily rising losses, from $1.1 million in 2002 all the way through MELA's $20 million annualized loss of the past 12 months. The stock's also terribly difficult to value, inasmuch as it has not only no profits to hang a price tag on, but also no revenues.

I mean, say what you want about medical-device makers MAKO Surgical (Nasdaq: MAKO  ) and Hansen Medical (Nasdaq: HNSN  ) -- at least they have products on the market and multimillion-dollar revenue streams to support their stock prices. All MELA has is a whiz-bang product and a dream. And even if it succeeds in its plan to put 200 MelaFind melanoma detectors in the hands of dermatologists next year, the anticipated $7,500 fee to lease and train on the new machines would yield only $1.5 million in revenues -- giving the company a P/S ratio of nearly 100!

Would the devil's advocate please address the court?
So ... is there any hope for investors who've gotten in early on this stock and hope to one day make a profit from the investment? I wouldn't bet the ranch, but I do see at least one way in which a MELA bull can argue that today's valuation is reasonable.

Consider: Even lacking P/E and P/S, we can still look at MELA's stock price as a function of price-to-book value -- P/B. Viewed in that light, MELA's 5.7 P/B ratio isn't really all that unreasonable. Companies like Medtronic and Hansen are cheaper than MELA, sure. But Intuitive Surgical shares cost a 7.3 P/B, while MAKO Surgical sells for a P/B ratio of 13.5 -- more than twice MELA's valuation. Even if MELA fails to make a successful run at marketing its product, therefore, I could see how a larger, better-funded, better-sales-staffed med-equip giant like General Electric (NYSE: GE  ) or Siemens (NYSE: SI  ) could justify making a bid to acquire the company, now that MELA has a working, FDA-approved product to recommend it.

In short, although Stephens' recommendation to buy MELA Sciences may be speculative, it's not necessarily wrong.

MELA Sciences' new product is whiz-bang medical technology. But here at the Fool, we think we've found The Only Stock You Need to Profit From the NEW Technology Revolution. Read all about it in our new -- and free! -- report.

Fool contributor Rich Smith owns no shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 318 out of more than 180,000 members.

The Motley Fool owns shares of Medtronic. Motley Fool newsletter services have recommended buying shares of MAKO Surgical and Intuitive Surgical. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On November 10, 2011, at 7:29 AM, jrusso9722 wrote:

    Your current commentary on MELA seems like damage control on the previous commentary, you mention. People expect more, in financial reporting.

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