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." The pinstripe-and-wingtip crowd is entitled to its opinions, but we have 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.

Bright and early this morning, in the wake of last week's sell-off, Street analysts decided to go shopping. We'll look at three of their new buy ratings today, for DryShips (Nasdaq: DRYS  ) , Linn Energy (Nasdaq: LINN  ) , and Aastrom BioSciences (Nasdaq: ASTM  ) . Let's dive right in.

DryShips: Finally seaworthy?
With their stock up 5%, shareholders of dry bulk shipper DryShips were cheering this morning -- and cheered, too, by the initiation of the company at "buy" by Global Hunter Securities. With the shares down 41% over the past year, is it now finally time to clamber back aboard this incredibly leaky boat?

Sure, the stock looks cheap at 8 times next year's projected earnings, but DryShips is still far from a safe port. The company's mired in debt -- more than $4 billion net of cash, at last count. The Baltic Dry Index, to which DryShips' fortunes are tethered, has bounced back from recent lows, but it began dipping again earlier this month and has flatlined in recent weeks. Plus, if memory serves, DryShips is still based in Greece. Hardly the most stable place to be doing business these days.

When you consider all this, and add the fact that DryShips is still burning cash, and hasn't been truly free cash flow-positive but once (and then only briefly, in 2009) in the past five years, and Global Hunter's prediction that the shares will nearly triple to hit $6 within a year seems more fantasy than reality.

Should you toe the Line?
And speaking of cash-burning, debt-laden companies: Linn Energy. The independent oil and gas company just got initiated at "buy" by MLV & Co., which according to StreetInsider.com is positing a $42 target price on Linn shares within one year's time.

But while less aggressive than Global Hunter's prediction ($42 would make for just a 16% profit from today's prices), MLV's prediction looks no more substantiated. Not a single major media outlet has details on MLV's recommendation, meaning that as individual investors, we're forced to work based only on the numbers we've got.

And yes, at first glance, the numbers do look promising. Linn shares cost only 7.5 times earnings today, versus long-term growth predicted to average 6% over the next five years. Dividends are an even greater attraction, of course, with Linn yielding more than 8% a year. The question remains, however, whether Linn is going to be able to sustain this payout when all it has in the bank (at last report) is a measly $24 million, against more than $4.9 billion in debt, and a record of burning cash at a rate approaching $300 million per year over the past 12 months.

Suffice it to say the odds don't look good on this one. While there are stocks out there that can make a lot of money from $100-a-barrel oil (and we've found three of them), Linn isn't one of them.

Stem cells for everyone!
Last and least, we come to Needham & Co., and the two stem-cell stocks it decided to recommend investors buy this morning: Aastrom BioSciences and Pluristem.

In several respects, the recommendations are similar. Whereas Geron (Nasdaq: GERN  ) -- the former poster boy for controversial stem-cell research -- gave up on stem-cell research last year, these two companies are still plugging away at it. Both companies are targeting phase 3 trials for bet-the-company drugs aimed at treating critical limb ischemia -- ixmyelocel-T for Aastrom, and PLX-PAD for Pluristem. Both companies have amassed close to $40 million in cash to help fund their efforts. The critical difference here is how fast they're burning through this cash.

Specifically, with a cash burn-rate of more than $25 million per year, Aastrom is only about 18 months away from needing to find a new cash infusion. Pluristem's $6 million burn rate, in contrast, gives it significantly more breathing room.

Neither stock is a slam dunk by any means. To the contrary, each company looks pretty pie-in-the-sky to me, with price-to-sales ratios in the three and four digits, and no chance of profits in the foreseeable future. If you're willing to invest in bleeding-edge medical science, though, and aren't dissuaded by seeing the pioneer in the industry (Geron) walk away from its stem-cell program, then at the very least, I think you'll lose less money, and more slowly, by investing in Pluristem rather than Aastrom.

Whose advice should you take -- Rich's, or that of "professional" analysts like Global Hunter, MLV, and Needham? Check out his track record on Motley Fool CAPS, and compare it with theirs. Decide for yourself whom to believe.

Fool contributor Rich Smith owns no shares of, nor is he short, any company mentioned above. He does, however, have public recommendations available on more than 60 separate companies. Check them out on Motley Fool CAPS, where he goes by the handle TMFDitty -- and is currently ranked No. 319 out of more than 180,000 CAPS members. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.


Read/Post Comments (6) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 22, 2012, at 11:35 PM, thecannula wrote:

    Rich- You failed to mention that ASTM is currently in Phase 3 with a SPA in CLI- Fully funded- $40 Million- by Eastern, while PSTI is still stuck in Ph1- the CEO having already made a "Motley Fool" of himself on 1/24/11 by declaring to Ray Dirks in CP Reports that CLI ph2/3 was eminent. That was 16 months ago. They recently got the go ahead on Ph2 for intermittent claudication (cramps)- Not exactly apples and apples Rich- That's why Needham declared ASTM the likely First to Commercialization- right Rich?

  • Report this Comment On May 23, 2012, at 8:11 AM, orazioman wrote:

    I agree with thecannula this is poor writing and bad information by the fool...

    ASTM's burn rate is much higher, because we are in a SPA Phase III and have already injected multiple patients and are 11-17 months away...

    As for PSTI they have not even started a PI/II, they just released a CEO letter stating so...

    ASTM is the clear winner and will be making billions before PSTI even gets to phase III.

    Motely needs to put out a correction statement, or tell the truth they are shorting ASTM... I am long on ASTM and own 25 thousand shares...

  • Report this Comment On May 23, 2012, at 10:16 AM, skyyhi wrote:

    ..DRYS > financials are HQ'd in The Marshall Islands, I believe...

  • Report this Comment On May 23, 2012, at 1:02 PM, Motleycommenter wrote:

    Let me get this straight. Motley allows someone to post an article about a stock by someone who doesn't even know that a burn rate to fund a pivotal 600 patient phase III study at 80 sites is higher compared to an interim 130 person Phase II study at 10 sites. Does he know the difference between a Phase III and Phase II study? Does he even know the difference between adult stem cells and embrionic stem cells (since he is comparing ASTM to Geron, who unlike ASTM wasn't close to Phase III and got out because there was no end in site for completing studies for embrionic stem cells). And we should take any articles that are posted by this person or on this website seriously why? Come on.... Also long on ASTM.

  • Report this Comment On May 25, 2012, at 6:20 PM, TechInvestor42 wrote:

    There are multiple stem cell approaches that are being pursued - autologous (meaning the patients own cells), allogeneic (meaning derived from a young healthy donor), embryonic derived (or more specifically, "differentiated" cells that can fulfill a specific set of functions, like nerve cells, liver cells, bone cells, etc.), and other related approaches.

    To dismiss the entire field of stem cell therapy because Geron's board decided to abandon development of ES derived neural cells to treat spinal cord damage is quite naive, and candidly, shows how ill informed ctain people are about this field. Geron's board decision was founded on a recgnition that the trial, which was a safety study being conducted in 10 patients, was very expensive, was going to take several years to enroll, and unless at least a few people starting getting up out of their wheelchairs, it wasn't likely to generate a lot of excitement. The study was designed to show safety in a limited number of patients - nothing else. That's because the FDA and other regulatory agencies require that companies demonstrate at least some record of safety before conducting larger scale clinical studies with an experimental therapy. This is to protect patients from unanticipated risks - sometimes things happen in humans that don't happen in animals, and you have to be prepared for that.

    What is totally unrecognized here is the enormousmprogress being made in the field. There are now several hundred clinical trials being conducted using stem cell and related cell therapy technologies, and there are a handful of approved therapies now available that are being used to treat patients, and are making money. Just recently we have seen 2 newly approved products - the Organogenesis product for dental grafts, and the Osiris Prochymal product for treating children with leukemia for Graft versus Host Disease, which can be debilitating or even lethal. These are small markets to be sure, but they join several other products already on the market. To the informed, these represent the start of something much, much bigger - cell therapy becoming mainstream medicine. It's worth noting that the currently available products have been successfully used to treat hundreds of thousands of patients. This is just the beginning.

    To those that know the field well, what is most exciting is the recent progression of leading companies that are advancing more and more clinical programs into mid and late clinical development - Phase 2 and Phase 3 studies. Not all of these will be successful, to be sure. But think about the areas that are being pursued - heart disease, vascular disease, stroke, diabetes, autoimmune disease, transplantation, etc. these are areas where conventional medical approaches have failed to have a meaningful impact. Success in ANY of else areas will change medicine as we know it, and will create billions of dollars of value, while improving clinical care for patients.

    The companies that can deliver therapies for these diseases will be the titans of tomorrow. Wall Street may be ignoring them now, but that's what makes it a great investment opportunity for the investors that can really understand the potential, and spot the winners from the losers. Remember, once upon a time, Wall Street felt the same way about biotechnology in general, and then antibodies, where the first few efforts to develop products failed. Ultimately, monoclonal antibodies became a mainstay for the industry, and today these types of therapies represent many of the biggest selling products. Furthermore, unlike pharmaceuticals, thsese types of therapies will nev be "genericized" - they are way too complex.

    Believe me, as things continue to advance, the herd on Wall Street will begin to move in this direction, in a big, big way.

  • Report this Comment On May 30, 2012, at 10:56 AM, fezziwig2008 wrote:

    RICH ARE YOU THERE? OH THIS WAS A DUMP AND DUMP- I SEE!

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