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.
And speaking of the best ...
An investor in stocks could do a lot worse than by studying Stifel Nicolaus. Ranked in the top 5% of investors we track on CAPS, this banking ace is literally one of "the best" stock-pickers Wall Street has to offer. And this morning, Stifel came roaring back to the equity markets with a series of biotech picks.
On Thursday, Stifel resumed coverage on each of Acorda Therapeutics, Affymetrix, Amgen
But it didn't stop there. It seems that trying to juggle seven stocks simultaneously wasn't hard enough for Stifel, so just to make things interesting, it also added five new recommendations to its list, initiating coverage on Ariad Pharma
Pity the Fool
Now, not being a big-time biotech analyst myself -- and, more to the point, not having a team of lackeys to help me crunch the numbers, I'm afraid I won't be able to go into great detail on the dozen denizens of Stifel's new biotech shopping list. But a brief survey of the stocks, at least, is in order.
Surveying the list, here's how the stocks look, in relevant numbers:
| P/E | Growth Rate | Free Cash Flow Positive? | |
|---|---|---|---|
| Accorda | 33.8 | 28% | Yes |
| Celgene | 26.7 | 25% | Yes |
| Biogen | 24.1 | 11% | Yes |
| BioSpecifics | 17.9 | Unknown | No |
| Amgen | 16.8 | 9% | Yes |
| Gilead | 13.3 | 15% | Yes |
| Exelixis | 9.4 | Negative | No |
| Affymetrix | n/a | 5% | Yes |
| Ariad | n/a | 10% | No |
| ArQule | n/a | 5% | No |
| Cempra | n/a | Unknown | No |
| Dendreon | n/a | Negative | No |
Source: Yahoo! Finance and Capital IQ.
So what can we glean from these numbers? Curiously (for a biotech analyst) and reassuringly (for investors), it appears that Stifel is focusing its biotech research on companies that have a history of generating GAAP earnings. While Stifel has new unprofitable up-and-comers on its watchlist, for the most part it's urging investors to focus on companies that have actually shown they know how to make a profit.
Less reassuring is the analyst's inclusion of multiple firms with unknown or negative growth rates, and the presence of a good half-dozen shops whose free cash flow records fail to back up the earnings their income statements claim they've made. I'm particularly unenthused with Stifel's recommendation of Cempra, although I do share its doubts on Dendreon -- both stocks strike out on all three tests, since they're unprofitable, burn cash, and possess questionable growth prospects.
Seems to me, the best bets on this list are Accorda and Celgene, which both sport estimated growth rates high enough to support their P/E ratios, and especially Gilead Sciences, which boasts one of the cheapest P/Es on the list; a modest, but still good growth rate; and plenty of free cash flow to back it all up. (Indeed, Gilead Sciences generates more free cash flow than it even reports as net income -- one key reason why I made a positive CAPScall on the stock myself a few weeks ago.)
Foolish takeaway
Based on its six-year history as a top-performing analyst on CAPS, I don't dismiss any of Stifel Nicolaus's recommendations lightly. That said, if you're just starting out, and want to give these picks a bit of time to "mature" before following Stifel's lead into them, I couldn't fault the prudence of that path, either. My advice: Take a look at Gilead Sciences first of all. It's got the best valuation of the bunch, and it seems to me a fine place to start.
And if you're really looking to make some money in the healthcare industry, for your second step I'd suggest you take a look at our new, free report. It just might lead to you discovering the Next Rule-Breaking Multibagger.
