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 did.

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

And speaking of the best ... and worst ...
With three of the biggest names on Wall Street giving a thumbs-up to Human Genome Sciences (Nasdaq: HGSI) this morning, the shares are bouncing back from yesterday's sell-off. For those who missed the news, HGS got hit hard on news that the independent Data Monitoring Committee (DMC) associated "serious lung-related side effects" with use of the 1,200-microgram dosage of HGS's experimental hepatitis-C drug Albuferon. HGS shares sank 44% in response, but our three guest stock-pickers today -- Bear Stearns, RW Baird, and Piper Jaffray -- think the damage was overdone.

Why is that? While DMC found problems with the 1,200-mcg dosage, it recommended that participants in the drug's phase 3 clinical trial be switched to a lower, 900-mcg dosage -- "essentially confirming the safety of this dosage," as Piper Jaffray said in its bull thesis. Piper believes that the lower dosage will ultimately be approved and that the drug will make it to market. Baird agrees with this argument and adds that HGS also has a stable of drugs in phase 2 trials, with any one of those drugs being able to provide additional "positive catalysts" in 2008. All three of the analysts agree that the stock price, which has been almost cut in half, now makes HGS a buy.

So the only question that remains is: Do any of these analysts have a record of picking good drug stocks?

Let's go to the tape
As it turns out, they do.

While each of our three players today has proved its ability to pick winning drug stocks at one time or another, their overall records vary widely. Bear Stearns has the best rep of the three, with a CAPS rating in the top 10% of investors, and it gets the majority of its picks right. Piper is less impressive, rating a humble 67.76 in the CAPS universe, and is getting significantly more picks wrong than right. And we're least bullish on Baird, which is wrong nearly as often as Piper and makes more spectacular missteps when it is wrong. Baird's CAPS rating is down below the 20th percentile as a result.

Now, I'm not a doctor, nor do I play one online. But putting the three analysts' diverging records aside, I have to say I agree with the basic premise of their upgrades today. If HGS has several drugs in its pipeline, and the only problem with Albuferon in particular is that it was being tested at too high a dosage, then this kind of news doesn't justify a near-halving of the company's value.

We have here an unprofitable biotech that could soon have a revenue-generating drug on the market, with probably enough cash on hand to get it there. HGS has lots of debt, sure, but it also has around 18 months' worth of cash at the present cash-burn rate. Whether Albuferon's prospects justify the valuation at today's price -- well, you're better off asking our biotech experts at Motley Fool Rule Breakers on that one. But from where I sit, things are looking pretty good.