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.
Will MAKO make you rich?
Good news for fans of robotic-surgery specialist MAKO Surgical
Bright and early Tuesday morn, the Japanese stock-picker predicted a bright future for this maker of orthopedic surgical arms. Within a year, this $42 stock will hit $52 -- a clean 30% profit. But how likely is that to happen, really?
Let's go to the tape
Judging from Mizuho's record to date, not very likely. Mizuho's been making public stock predictions in the sector for only about four months now, but already it's racked up a record as one of the worst stock-pickers on Wall Street. Barely 35% of its recommendations manage to outperform the market. The average pick underperforms the S&P 500 by more than 4 percentage points. Hardly inspiring.
And although I suppose you'd expect me to like this week's recommendation at least (MAKO is, after all, an official recommendation of Motley Fool Rule Breakers), the truth is that I'm not impressed with MAKO's performance at all.
Why not? Let's start with the analogies. Like Rule Breakers' famous -- and successful -- recommendation Intuitive Surgical
But here's the problem: When you drill down into the financials, MAKO bears much closer resemblance to Hansen than to Intuitive. It's unprofitable for one thing, and while growing quickly, it still works off a tiny revenue base -- so small that MAKO's $1.8 billion market cap equates to a very optimistic valuation of 21 times annual sales. MAKO's also burning cash like mad, its $39 million in trailing negative free cash flow actually a bit worse than the $36 million than Hansen burnt last year. (In contrast, Intuitive generated close to $595 million in positive free cash flow last year.)
180 degrees opposite of good
While Intuitive is doing a lot right in the robotic surgery space, MAKO seems intent on taking a different path. Despite growing revenues strongly in recent quarters, there's little improvement evident in the company's GAAP profits, or its free cash flow, either. It's done so bad, in fact, that unlike Intuitive Surgical, which consistently exceeds expectations, MAKO has managed to disappoint Wall Street in four of the past six quarters, reporting losses significantly worse than it was "supposed" to report.
Despite this history of consistent underperformance, however, investors have bid up MAKO shares by 65% over the past 12 months -- a number literally 10 times better than what investors in the broader S&P 500 have had to content themselves with.
Foolish takeaway
Listen, Fools. I'm all in favor of free money, and if Mr. Market wants to offer ever-higher prices for MAKO stock, despite the utter lack of justification for the run-up -- I say "great! Take the money!" But let's not get greedy. Let's not forget that the purpose of a business is to earn profits, and that MAKO has consistently failed to do anything of the sort.
My advice: Ignore Mizuho's advice. Don't buy MAKO Surgical today, but instead take the money and run.
That's what I'd do, and that's why right here, right now, I'm publicly making a prediction that MAKO Surgical will underperform the market from here on out -- and I'm rating the stock "underperform" on CAPS for that reason. (Think I'm wrong? Follow along.)
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