This Just In: 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." 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'll be tracking the long-term performance of Wall Street's best and brightest -- and worst and sorriest, too.

And speaking of the best ...
A pair of analysts upgraded the stock of generic drugmaker Mylan Labs (NYSE:MYL) yesterday. UBS, which had previously rated Mylan "neutral," now considers it a buy. In an even more dramatic turnabout, Credit Suisse went from "underperform" (sell) to "outperform" (buy) in the space of a day. According to the analysts, Mylan may have some trouble integrating its two recent purchases -- the generics unit of Germany's Merck KGaA, and a majority stake in India's Matrix Labs -- but even if it does, the stock's 33% tumble over the last four months more than prices in this risk.

Strangely, at the same time as each firm was upgrading the shares, it was downsizing its "price target." According to the Associated Press, Credit Suisse reduced its target from $22 to $20. Meanwhile, UBS dropped its target from $20 to $19. (Which still leaves unanswered the question: Why was Credit Suisse still telling investors to sell a $15 stock that it thought would go to $22, and why did UBS rate "neutral" a company it thought was 25% undervalued as recently as last week?)

The two upgrades combined to tip Wall Street sentiment in favor of the drugmaker. On CAPS, a bare majority of the five analysts we track now give Mylan the thumbs up. But does that mean you should, too?

Let's go to the tape
Before blindly following these analysts' recommendations, it's worth taking a moment to consider the records of the firms doing the recommending. And as it turns out, those records are pretty good. Both UBS and Credit Suisse sit in the top 11% of investors, with CAPS ratings of 94.59 and 89.69, respectively. Both get more picks right than wrong, with accuracy records of 53% and 51%, again respectively.

Reviewing a few of their active pharma picks, we find:

Meanwhile ...

Foolish takeaway
Their overall sterling reputations notwithstanding, today's contestants both sport what might charitably be called a "mixed" record when picking pharmaceutical stocks. That said, I do see where they're coming from on this one. At a trailing P/E of 16, Mylan is currently priced at a discount to the average generic drugmaker. Its price-to-sales ratio carries a similar discount, yet the firm earns gross and operating margins that both significantly exceed the industry average.

In short, Mylan is cheap. The question is whether it's cheap enough. Fortunately, my Foolish colleague Rich Duprey recently tackled that question. Read "Pain in Mylan's Future" to learn why he thinks Mylan may yet have farther to fall.

And to learn what generic drugmaker we think offers an even more compelling value -- and brighter prospects than Mylan's -- grab yourself a free copy of Motley Fool Stock Advisor.