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

High profits, higher praise
As if it weren't enough to hear that Celgene (Nasdaq: CELG) grew its sales 31% in the first quarter, or that its profits rose 44%, that global Revlimid sales were up 46%, or Vidaza sales up 60%, Celgene shareholders got themselves a real treat yesterday: Just hours after earnings were released, All-Star Wall Street banker Wedbush Morgan anointed Celgene with the mantle of "the next Genentech."

Ever since Roche took good ol' "DNA" private, the biotech world has been looking for its next superstar. And Wedbush thinks it's found it. Wading deeper into the biotech weeds, Wedbush initiated coverage on three new stocks yesterday:

• Avanir Pharmaceuticals -- an "off-the-radar-screen company developing ... a late-stage asset for the treatment of pseudobulbar affect (PBA)."
• Amylin Pharmaceuticals (Nasdaq: AMLN) -- whose Bydureon diabetes drug "will transform the treatment of Type 2 diabetes."

All of which pales in comparison to the one stock Wedbush picked, whose name doesn't begin with "A": Celgene. Citing "exceptional near- and long-term growth prospects," Wedbush believes Celgene "stands to become one of the few small molecule biotech companies to achieve a market cap in the tens of billions of dollars." Specifically, Wedbush posits a market cap of $50 billion "in the next 2-3 years."

So Wedbush believes we'll see Celgene nearly double in value within the next 24 to 36 months. But how likely is that, really?

Let's go to the tape
Biotech is one of Wedbush's most active sectors, ranking sixth on its coverage list. But it's not necessarily one of Wedbush's best. Only about 52% of the analyst's picks here go on to outperform the market ...

While nearly half the time, Wedbush veers off course and picks dogs (some with fleas):

As you can see, Celgene has been one of these canines in the past. So why is Wedbush picking up coverage of the stock once more -- and so enthusiastically?

Simply put, Wedbush sees value in the stock. While noting that "Celgene has earned the mantle of leadership among the megacap ... biotechnology companies," Wedbush laments the fact that its old fave "continues to trade at a multiple in line with its peer group."

What price growth?
But is that really the case? I mean, it looks to me like biotech standout Amgen (Nasdaq: AMGN) has a larger market cap than Celgene. And the company offers a lower P/E ratio -- on both trailing and forward bases -- than does Celgene. Granted, Amgen doesn't boast Celgene's zippy 23% projected long-term growth rate, but growth isn't the be-all and end-all of valuation.

For a growth stock to be worth buying, the price still has to be right. It has to bear some reasonable relation to the growth rate -- and to me, Celgene fails that test. Selling for more than 33 times earnings, including the latest results, and an only slightly less-out-of-whack multiple to free cash flow, Celgene looks priced for a perfection that's proven elusive (to Wedbush) in years past.

Foolish takeaway
Even if you buy Wedbush's argument that Celgene is priced attractively relative to its peers, I don't see merit in the argument that the shares are priced attractively, period.

As buy theses go, I'm just not sold on Celgene.

But are you? Tell us about it, on Motley Fool CAPS.

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