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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." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
Canaccord discovers biotechs from A to Z
First, Canaccord Genuity announced yesterday that it was initiating coverage of Aegerion Pharmaceuticals (Nasdaq: AEGR ) . Then Alexion Pharmaceuticals. Then Ardea. Auxilium. BioMarin (Nasdaq: BMRN ) and Incyte. United Therapeutics, YM Biosciences (AMEX: YMI ) , and even something called ZIOPHARM. By the time it was finished issuing its ratings, Canaccord had slapped new "buy," "sell," and "hold" ratings on no fewer than 15 separate biotechs ... but said not a word as to why it was recommending any of them.
Sound and fury, signifying ... what exactly?
Although Canaccord's ratings were widely reported yesterday, none of the major news outlets seemed to have any idea what lay behind the analyst's multiple recommendations. The folks at Briefing.com were at a loss. Analyst Ratings Network, likewise. Our favorite source for details on ratings like these, StreetInsider.com, didn't know either. Indeed, even Canaccord's own daily research email contained only brief mentions of each new recommendation.
Here's a quick rundown, in order of the amount of potential profit Canaccord sees in each stock:
Potential Profit (Loss)
|Human Genome (Nasdaq: HGSI )||$10||27%||Hold|
|Dendreon (Nasdaq: DNDN )||$11||9%||Hold|
In the absence of having Canaccord actually come out and tell us why it's recommending what it's recommending, what can we glean from the above? A few things, at least.
Firstly Canaccord has high hopes for wildfire returns at a few these stocks. Unprofitable YM Biosciences appears to offer the hottest prospects, potentially doubling within a year, probably over investor interest for myelofibrosis drug candidate CYT387. Just as unprofitable and actually revenue-less Aegerion could do almost as well ... if it delivers with lomitapide, its orphan drug candidate currently under FDA review. With great risk, it seems, comes the potential for great reward. (Just make sure not to forget the "risks" part.)
It seems Canaccord doesn't seem to be recommending stocks based solely on having FDA-approved drugs. Buying a few shares of Human Genome, for example, is likely to earn investors more money than an investment in of Biomarin -- yet Canaccord counsels investors to only "hold" Human-G but go ahead and buy Biomarin. Why? Perhaps because the bull thesis for Human-G rests largely on a hoped-for buyout that, thanks to a slow rollout for lupus drug Benlysta, has proved stubbornly elusive -- while Biomarin has a near-term catalyst that could help it out, when its Phase 3 enzyme replacement trial for treating Morquio A Syndrome delivers results later this year.
Other recommendations, however, make less sense. For example, why does Canaccord recommend buying Alexion when (a) it's trading for more than 100 times earnings, and (b) by its own admission, Canaccord thinks the stock is fully valued and may gain at most 1% in share price over the next year? Why not buy Dendreon instead, which offers 9 times as much profit potential, and which -- if it can get Provenge sales rolling -- could be a tempting buyout target for pipeline-hungry Big Pharma?
Foolish final thought
A Fool can wonder whether, having underperformed the S&P 500 by more than 90 points the last time it dared to recommend Dendreon, the banker is just a little bit gun-shy about that stock today. In contrast, Alexion hasn't had a chance to burn 'em yet. And of course, Alexion is solidly free cash flow positive, a boast Dendreon isn't close to being able to make today, with a significantly deeper pipeline, too.
When you get right down to it, massive profit potential is a great thing to have ... but there's a lot to be said for owning a profitable business, so you can sleep soundly at night, too.
(And of course, best of all is when you can combine potential and profits all in one great package. If that sounds like something you'd be interested in, read the Fool's new free report: "3 Stocks That Will Help You Retire Rich.")