Get to Know a Guru

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." In our recurring column "This Just In," we cover the most headline-worthy upgrades and downgrades, testing the analysts' logic and examining their records to help you decide whether they're worth listening to at all. And in "Get to Know a Guru," we use upgrade and downgrade news as a springboard to introduce you to some of the lesser-known names in analyst-land. Up this week: Rodman & Renshaw.

Profiles in punditry
As a general rule, analysts like to post their ratings in the dead of night. Some say this is because the analysts want to avoid "moving the market" with their news. Others surmise that, when market-moving news comes out after the close of trading one day, the analysts like to sneak their changes of opinion out before trading opens the next day -- so as to look more prescient than they actually were. Whatever the true reason, it's almost unheard of for analysts to downgrade a stock in the middle of the trading day.

Speaking of unheard of, yesterday afternoon -- in the middle of the trading day, no less -- a firm I had never heard of before came out with a downgrade on the stock of micro-cap cancer researcher Vion Pharmaceuticals. The firm: Rodman & Renshaw. The reason: According to the analyst, an FDA decision to halt phase 3 clinical trials of Vion's Cloretazine leukemia drug on safety concerns raises "uncertainty surrounding the clinical development plan." And how.

I'll get back to Vion in a moment, but the main purpose of this column isn't to investigate the investability of tiny biotechs -- it's to pull back the veil of anonymity shrouding analysts who recommend these kinds of investments. If I've never heard of Rodman & Renshaw, I'm betting there are a lot of other Fools out there who likewise haven't a clue who these guys are, or whether the firm's opinions should carry any weight. We're going to answer both those questions right now.

Who is Rodman & Renshaw?
That's the question of the hour. Fortunately, on Motley Fool CAPS, we track this firm and know the answer. Here's what CAPS has to say about R&R: "Rodman & Renshaw is a privately-held, full-service investment bank focusing its financial products and services on emerging growth companies. The Research Department consists of analysts with in-depth expertise in their respective industries. Analysts strive to identify high-quality, undervalued companies that are underfollowed by the broader market."

Further digging reveals a firm with a unique history. Founded in 1951 as a private partnership, R&R has over the years been an NYSE-listed public company and a subsidiary of the Mexican state before returning to private ownership in 1998. With about a half-dozen senior analysts on staff, the bank's research department bills itself as especially skilled in technology and biotech -- but a glance at R&R's coverage list shows that this firm is first and foremost a biotech shop, and its forays outside that sphere are few and far between.

Are these guys any good?
So much for the firm's biography. What we really want to know about is its resume. When R&R speaks, should investors listen?

There's no nice way to say this: No, you absolutely should not listen to anything Rodman & Renshaw has to say. I don't mean to sound harsh, but R&R's record is simply abysmal. On CAPS, we hide its rating behind the fig leaf of an "Under 20" euphemism. But you can assume the firm's true rating is very low indeed -- because its overall CAPS score is negative, and its 36% accuracy rating tells you that R&R is wrong nearly twice as often as it's right. For instance:

Of course, every dog has its day. R&R's good days were when it picked stocks like:

Return to Vion
In contrast, the day R&R picked Vion was a bad day indeed -- for investors who followed R&R's advice. According to CAPS, the banker rated Vion a "market outperformer" on May 11. By the time R&R reversed course two weeks later, Vion had already underperformed the market by a stunning 52 points, losing more than half its market cap in the process. Ouch.

Adding insult to injury, it seems investors now consider R&R to be a contrarian indicator. On the day R&R downgraded the stock, Vion's shares ticked up 5%.

If you can't say anything nice ...
Let's not end this column on a down note, though. I do have one nice thing to say about R&R: Its top-performing pick in all the time we've tracked it on CAPS is one of only two underperform ratings it has assigned (out of 43 total picks). Both underperform ratings, by the way, are in the green -- so perhaps pessimism is an attitude R&R should adopt more often. (Find out which two stocks got the thumbs-down from R&R when you check out its CAPS page.)

Meanwhile, if you'd like to hear from an analyst with a truly stellar record of calling Vion right, click on over to Vion's CAPS page. There you'll learn that the "analyst" who knows Vion best is no analyst at all, but an ordinary, individual investor just like you and me.

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Fool contributor Rich Smith does not own shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 916 out of more than 29,000 raters. The Fool's disclosure policy gets floors sparkling clean.