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 best...
As markets wound down toward a well-deserved rest on Friday, one analyst was just getting wound up. If you're wondering why Gilead Sciences (Nasdaq: GILD) sidestepped the market downturn last week, and outpaced the market again this morning, thank the friendly analysts at Piper Jaffray. Initiating coverage of Gilead on Friday, they advised investors to buy the stock amid overblown concerns about the risk to its patent portfolio.

According to Piper, "[Gilead] faces patent expirations for several key drugs from 2015-2018 that could lead to over 55% of 2009 revenues facing generic competition." Fears about what this will mean for the firm's "HIV franchise" have investors pricing Gilead shares at just 12 times fiscal 2011 earnings estimates, versus a "large cap peer average of 14x." But according to Piper, these fears are exaggerated, and investors are giving Gilead "almost no credit to be able to offset lost revenues, despite two new HIV combination pills that could launch in 2011 and 2013 and generate $8bn in sales in 2017."

With prospects brighter than they appear, Piper says now's the time to take advantage of this "free call option" and buy Gilead. But is Piper right?

Let's go to the tape
At first glance, you might think not, because Piper's not exactly a perfect picker of biotech stocks. Over the three years we've been tracking it, in fact, Piper has picked a whole slew of losers in this space...

Companies

Piper Said:

CAPS says:

Piper's Picks Lagging S&P By:

Array BioPharma (Nasdaq: ARRY)

Outperform

****

67 points

Genzyme (Nasdaq: GENZ)

Outperform

****

44 points

Novavax (Nasdaq: NVAX)

Outperform

*

27 points

Indeed, at last report, Piper was scoring barely more than 50% for the accuracy of its biotech predictions. Yet every once in a while, Piper does get a pick right -- and in the biotech market, finding just a handful of multibagger winners can more than make up for a multitude of losers. In this regard, Piper's doing just fine by its clients, thanks to winners like the following:

Companies

Piper Said:

CAPS says:

Piper's Picks Beating S&P By:

Medtronic (NYSE: MDT)

Outperform

****

10 points

Celgene (Nasdaq: CELG)

Outperform

****

25 points

Human Genome Sciences (Nasdaq: HGSI)

Outperform

*

55 points

Piper's portfolio of biotech picks -- as a whole -- is in fact outperforming the market by a whopping 177 percentage points. Call me a Fool, but I believe Piper just might pull another rabbit out of its hat with this Gilead pick.

Gilead generated $7 billion in sales last year. If "55%" of its revenues are at risk, as Piper tells us, then the worst-case scenario should be a loss of about $3.85 billion in revenue. But there are two caveats you should bear in mind when weighing that figure:

  • First, any reduction in revenue from drugs going off-patent would almost certainly be less than $3.85 billion. (Sure, lots of people will buy generic rather than branded pharmaceuticals if given the option -- but not everybody will.)
  • Second, I'm pretty sure $8 billion is more than $3.85 billion. Piper's saying that as Gilead continues to tweak its product portfolio, the company won't just replace any revenue lost from drugs falling off-patent, but also add billions more.

Gilding the lily
If all this sounds pretty good to you already, feel free to stop reading right here. I'd argue that this story's even better than it already sounds.

Gilead reported earnings of $2.6 billion last year, but the company actually generated $2.85 billion in free cash flow on its $7 billion in revenue last year -- an incredible 40.6% free cash flow margin.

With no net debt, the company sells for just 15 times free cash flow, and just less than 17 times earnings. In addition, most analysts expect it to grow earnings at more than 14% going forward. This suggests the stock is pretty fairly priced. If Piper is right about the patent pessimism baked into these estimates, the company could grow even faster -- making Gilead a gold-plated bargain.

That's the way I see it. What do you think? Click over to Motley Fool CAPS now, and sound off.

The Fool owns shares of and has written puts on Medtronic.

Fool contributor Rich Smith has no position in any of the stocks named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 700 out of more than 160,000 members. The Motley Fool has a disclosure policy.