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.

Welcome, welcome, welcome!
Er, actually, Intuitive Surgical (Nasdaq: ISRG) shareholders may not feel in a particularly welcoming mood as regards this week's featured analyst. Brigantine Advisors initiated coverage on the maker of surgical robots yesterday, you see. Unfortunately, after taking a look at the stock, Brigantine didn't at all like what it saw.

While admitting that Intuitive offers a rare "bullish story" in the technosphere, the analyst warned that "even the most bullish story has a price" -- and Intuitive's is simply too high. Citing "a variety of valuation metrics," Brigantine called the stock "extremely over-extended" on every one. But is this single analyst's opinion enough to justify the sell-off we saw in Intuitive Surgical stock yesterday?

Let's go to the tape
Brigantine only began submitting its ratings to Briefing.com for publication last month, at which point we added it to our list of Wall Street tracking in CAPS. So, the analyst remains a relative unknown. Lacking a large stable of past picks, it's hard to say whether Brigantine will ultimately be proven a seaworthy stock picker, or an advisory shipwreck. So far, however, the analyst appears to be largely treading water in its chosen field of technology stocks:

Brigantine's record currently stands at an unremarkable 50% accuracy -- four winners total (including Intuitive), and four losers. What are the chances, though, that this week's recommendation to sell Intuitive will be the one pick that float's Brigantine's boat?

Pretty darn good
Sketching out the stock's story, Brigantine notes that: "[Intuitive Surgical] remains an anomaly in the large cap med-tech sector, generating 20%+ top and bottom-line growth in an environment characterized by curtailed hospital capex spending, stressed state and municipal budgets, mounting unit pricing pressures and surgical procedure slowdowns."

But while Intuitive has fared well in this environment so far, Brigantine argues that this story's simply too good to last: "We think overall expenditures on capital equipment will be flattish in 2010," limiting Intuitive to "2010 revenue growth of nearly 26% to $1.32B," followed by "19% growth in 2011 to $1.57B." The 2010 number, by the way, is ahead of what even Intuitive Surgical has indicated, according to Brigantine. Consequently, even if the company exceeds its own guidance, Brigantine would still say you should sell the stock.

As for me ... I wish I could disagree with Brigantine's analysis, but I cannot. As you probably know, Intuitive Surgical is a recommendation of the Motley Fool Rule Breakers growth investing newsletter. It's also a stock I've owned several times in the past (albeit, at better prices), and a company whose products -- and prospects -- fascinate me.

Problem is, Intuitive Surgical simply does not seem to offer much hope of rewarding investors today. The stock sells for 60 times earnings, which looks on its face overvalued relative to consensus expectations of 22% long-term earnings growth. Relative to the P/Es on offer at other big medical equipment makers -- Johnson & Johnson (NYSE: JNJ) at 14, Stryker (NYSE: SYK) at 19, Medtronic (NYSE: MDT) at 21 -- Intuitive's valuation seems a bit rich.

Sure, Intuitive's growing faster than any of these three worthies. Also true, Intuitive boasts free cash flow far surpassing its reported net income (as does Medtronic). Yet even giving Intuitive every possible benefit of the doubt -- valuing it on free cash flow rather than earnings, and using the firm's historical growth rate instead of the less frisky forward projections, the best I can say about Intuitive is that it may be only slightly ... overpriced. After a remarkable run-up, I don't think this stock is cheap enough to own any longer. It may be (in fact, my hunch says it is) vastly overvalued.

Foolish takeaway
I wouldn't touch Intuitive Surgical stock with a 10' scalpel at today's price. And it's more than intuition that's got me scared, Fools. The numbers here are practically screaming to me: Stay away!