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.

And speaking of the worst...
Are you sitting down, Pharma investors? Because you don't want to faint when you hear this news: Piper Jaffray just recommended buying Teva Pharmaceutical (NASDAQ:TEVA).

For now, investors seem to be reacting positively, with Teva shares trading above where they were when the "initiation of coverage" was announced. But that could change, once investors learn about Piper's record in the drug space:

Admittedly, Piper ranks in the top 20% of investors tracked by CAPS. But to my Foolish eye, it looks like Piper is coasting on the strength of a few wildly successful picks in another industry entirely – semiconductors – where buy recommendations on stocks like Cree (NASDAQ:CREE) and Silicon Labs are boosting the analyst's overall scorecard. Meanwhile, in Biotechnology, Piper boasts an anemic 44% record for the accuracy of its predictions ... and scores a 23% in Pharmaceuticals.

Talk about Teva
According to Piper, much ado has been made over the risk to profits, should a generic version of Teva's multiple-sclerosis drug Copaxone appear on the market. Piper describes Copaxone as: "a mixture of random chains (polymers) of amino acids ... it is not even fully known which of the specific amino acid chains are therapeutically active." And if you think that sounds complicated, wait till you get a load of Piper's argument in favor of Teva.

Painting a worst-case scenario, Piper argues that: "strong EPS growth (we estimate a 5-year CAGR of 7%) is sustainable [even if] a Copaxone generic [appears] in 2014. We further believe that Teva will continue to be opportunistic on the acquisitions front, particularly in bolstering its higher margin brand business. The continued growth of generics, both in the U.S. and overseas, makes Teva a top long-term health care holding in our opinion."

But is that wise? I mean, right now, Teva shares sell for a lofty 49 multiple to earnings. Viewed under the softer light of valuation on free cash flow, the shares sell for a more reasonable-sounding 17.5 multiple. That latter number, at least, suggests a valuation close to fair if we assume that analyst consensus five-year growth estimates of 16% are correct. But if the consensus number is off, and particularly if Piper's worst-case scenario of 7% growth comes to pass, I fail to see how Teva shares can be called anything other than vastly overvalued.

Foolish takeaway
In making its buy recommendation, even Piper concedes that Copaxone generates "worldwide sales of over $2.9B" for Teva, and is the company's "highest margin product (nearly 30% of its gross profits)."

Knowing the risk posed by generic competition, and seeing the numbers laid out above, I believe Piper makes a grave error in recommending these shares. The margin of safety just plain isn't there, folks. My advice: Lay off the Teva for now. Take two aspirin, and call me when the price gets more attractive.