This Just In: Upgrades and Downgrades

Today was a "good news, bad news" sort of day for investors in biotech Seattle Genetics (SGEN +0.00%). On the one hand, shares in this cancer researcher have gained more than 16% over the past year. On the other hand, one analyst thinks these same shares are poised to lose all of those gains -- and more.

Goldman Sachs says: Sell Seattle Genetics
On Wednesday, Goldman Sachs announced that it is initiating coverage on Seattle Genetics with a sell rating. Citing the stock's surge in 2015, Goldman worries that the stock is now "fully valued" to account for all the good things that might happen to it over the next year, but not priced to account for its many risks.

In particular, Goldman notes that while there is a potential for "label expansion" to grow revenue for Seattle Genetics' Hodgkin lymphoma drug Adcetris, this "upside ... is already well-captured in the share price." On the down side, Goldman worries about a "lack of clarity" in Seattle Genetics' "early stage pipeline," while data from phase 3 trials for more mature drug candidates will not arrive until late 2016-2018. (And those results may not even be favorable).

In short, there are a few things that can go right for Seattle Genetics -- but also a whole lot that can go wrong. But is Goldman Sachs right about the risks here? That's the real question.

Let's go to the tape 
Unfortunately for Seattle Genetics shareholders, Goldman may well be right. Ranked in the top 20% of investors we track at Motley Fool CAPS, Goldman is one of the better analysts out there -- and it's particularly good when it comes to biotech and pharmaceuticals. According to our data, Goldman's significantly more likely (57%) to be right than wrong when recommending a biotech stock. Meanwhile, fully 15 of its 18 active pharmaceuticals picks are beating the market.

A few examples:

Valuing Seattle Genetics
I have to say that, after reviewing Goldman Sachs' record, and considering how very negative the analyst is on the stock (which according to StreetInsider.com, Goldman is now valuing at just $33), things are not looking good for Seattle Genetics' prospects.

They look even worse after you examine the company's financials.

With less than $320 million in annual revenue to its name, but a market cap well in excess of $6 billion, Seattle Genetics shares sell for the princely valuation of 20 times sales. That's not an unheard of valuation in the risky biotech sector. Then again, the average biotech tracked by Yahoo! Finance earns at least some profits from its business. Seattle Genetics earns none.

To the contrary, data from S&P Capital IQ confirm that over its 17 years of existence, Seattle Genetics has never earned a full-year profit. Instead, its losses are increasing. The company booked $122 million in combined losses over the past 12 months, and burned through more than $150 million in negative free cash flow.

A better way to make money
With more than $730 million in the bank (an amount replenished by a big share issuance last quarter), Seattle Genetics is at no risk of running out of money anytime soon. On the other hand, judging from its history, it's at no "risk" of earning a profit anytime soon, either.

So what's a better stock to invest in?

One look at Goldman Sachs' record suggests that Gilead Sciences might make for a good alternative. Priced at less than 5 times sales, it's a significantly cheaper stock than Seattle Genetics. Gilead Sciences is also profitable and free cash flow positive -- massively so. Over the past 12 months Gilead generated roughly $17.7 billion in cash profits.

Motley Fool CAPS members -- including more than 88% of our All-Star investors -- love it. Gilead Sciences earns a full five-star rating on CAPS, the highest rating our members can give. And with Gilead selling for the bargain-basement price of less than 10 times earnings, I'm inclined to agree with them.