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 track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

And speaking of the best ...
Is Big Pharma doomed? If you've been listening to the mainstream media lately, you could be forgiven for thinking so. Thin product pipelines. Rising competition from generics. The pundits tell us that a perfect storm is brewing, and it's bound to swamp the Old Guard of the industry. But according to a series of new ratings issued by Swiss stock savant UBS, there's life in this sector yet.

Yesterday, UBS "initiated" coverage on four of the Biggest names in Pharma, boosting shares of buy-rated Pfizer (NYSE:PFE), giving smaller lifts to neutral-rated Bristol-Myers Squibb (NYSE:BMY) and Eli Lilly (NYSE:LLY) – and curiously appearing to actually hurt Pfizer's fellow buy-ratee Merck (NYSE:MRK). What's the story behind the headlines? That's what we'll discuss today.

Let's go to the tape
But first, a "word from our sponsor." Before addressing what UBS had to say, let's take a quick glance at the analyst's record, and find out if there's any reason to be listening at all...

Companies

Baird Says

CAPS Says

Baird's Picks Beating S&P by

Teva Pharmaceutical (NASDAQ:TEVA)

Outperform

*****

63 points

Vertex Pharma (NASDAQ:VRTX)

Outperform

***

33 points

Johnson & Johnson (NYSE:JNJ)

Outperform

*****

1 point (2 picks)

So it turns out, there is. The size of UBS's victories in the Pharmaceuticals Biotechnology sectors vary widely, from its skin o' the teeth outperformance on Johnson & Johnson to the massive, blockbuster win on Teva Pharmaceutical.

One fact that shines through, though, is UBS's outstanding record for accuracy on drug stocks. 57% of the banker's recommendations in Pharma have outperformed the market over the last three years; its record for accuracy in Biotech stands at 59%. (And if you don't think these are numbers to be envied ... they are.)

As for the four companies named in today's "initiation" ... well, first of all, I should point out that several of these companies would be more accurately called "re-initiations" of coverage, inasmuch as UBS has in fact issued ratings on Bristol, Merck, and Pfizer in the past (albeit, at some point it apparently discontinued its coverage.) It's also racked up a pretty impressive performance, easily beating the S&P's performance on its Bristol pick, exceeding the S&P's rise on a pair of Merck recs as well, and lagging only slightly on Pfizer.

You've seen the ratings, now learn the reasons
Clearly, UBS knows its stuff in this sector. So when the banker tells us that:

  • "These cash flow machines are underappreciated"
  • Reminds us that their "valuations are at historic lows [both] in absolute terms" and relative to other sectors of the economy
  • Predicts that global expansion will "stabilize earnings" and inspire "multiple expansion"
  • And perhaps most important of all, argues that health care reform is humbug ...

Well suffice it to say, there's good reason to give this analyst a listen.

Just one thing
Except for one thing: Mr. Market does not appear to be listening today, because the one stock that this star picker named its "favorite" is the very one that sold off on yesterday's upgrade: Merck.

UBS loves Merck for its peer-leading growth rate. Whereas Wall Street expects each of Pfizer, Bristol, and Lilly to basically stagnate over the next half-decade, posting a percent or two of annual growth if they're lucky, projections for Merck call for a growth rate several times faster -- 5%.

Yet despite looking a relative sprinter in a field of plodders, Merck sells for the lowest P/E ratio of the bunch -- 9.9, a valuation we have not seen since 2004, and more than a 45% discount to the firm's average P/E valuation for the past decade. And it has arguably the best balance sheet of the bunch; plenty 'nuff to insure its ability to keep paying out a generous 4% dividend yield. (Only Pfizer -- another UBS fave -- boasts a bigger cash stash, and that's on a stock nearly twice as big as Merck.)

Foolish takeaway
Call me a Fool if you want to (I promise, I won't take offense), but it looks to me like Mr. Market is getting it 100% wrong about Merck -- and UBS is 100% right. This is the right price for the right company, and a great time to scoop up shares at historical lows. Don't let it pass you buy.

Vertex Pharmaceuticals is a Motley Fool Rule Breakers recommendation. Pfizer is a Motley Fool Inside Value pick. Johnson & Johnson is a Motley Fool Income Investor selection.

Fool contributor Rich Smith does not own shares of, nor is he short, any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 946 out of more than 145,000 members. The Motley Fool has a disclosure policy.