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." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
And speaking of the best ...
Yesterday, one of the best analysts in the world initiated coverage of biotech drugmaker InterMune
The stock promptly sold off. Why?
Let's go to the tape
According to our CAPS stats, Canaccord is currently one of the hottest stock pickers on the Street, boasting a CAPS rating that outperforms 96% of the investors we track. That's not an easy trick, as Canaccord makes a habit of investing in some of the toughest stocks to pick winners from -- unprofitable plays on groundbreaking science. But so far, it's been doing a great job.
While Canaccord makes the occasional blunder, such as with its April recommendation to buy Amarin
In the dicier world of pure-play biotech -- InterMune's home turf -- Canaccord's record for accuracy is a less impressive 44% -- but it's still edging out the market overall, helped by successful multibagger bets on the likes of Illumina
Betting on InterMune
So surely, if Canaccord can make a go of picking winners and losers from the field of unprofitable biotechs, it will do even better with a firm like InterMune, right? After all, this stock has actual profits to measure and reliable data to use!
Well, yes, that seems logical. But consider: As fellow Fool Cindy Johnson pointed out back in May, InterMune isn't really profitable. It just looks that way, with an income statement boosted by a one-time rights sale to Roche last year inflating its apparent "earnings." But for this extra income, InterMune would not be showing the positive 17.1 P/E ratio we see today -- but something more like the negative P/E that most analysts expect it to sport next year.
Most years, InterMune continues to putter along with annual revenues depending on milestone payments, usually in the $50 million to $90 million range -- and operating costs that result in net negative profit margins. Meaning that as a general rule, InterMune is pretty much par for the course for Canaccord: a big bet on a drugmaker that might make it big someday, but currently isn't.
So should I buy it?
Don't get me wrong. There's reason to hope that when all's said and done, InterMune will indeed become one of those stocks that "makes it big." Last year, a Food and Drug Administration advisory panel voted 9-3 in favor of approving Esbriet. So there's certainly something to this drug, and reason for Canaccord's optimism. Problem is, history is rife with examples of companies such as Merck
What's more, consider that "end": According to Canaccord, even a favorable FDA ruling won't ultimately yield Esbriet's $1.5 billion in peak sales before 2019. That's an awful long time to wait for InterMune to grow into its current $2.1 billion market cap. Even if everything works out as planned, Canaccord's recommendation that you pay 1.4 times sales that InterMune will make eight years from now sounds a bit risky.
If you're in the habit of betting on moon shots, I suppose you could do worse than following Canaccord's advice and buying InterMune today. Just please, please limit your exposure. I understand the attraction of trying to get in on the ground floor of a future-profits machine. Just try to remember that at a valuation this high, InterMune's elevator is at least as likely to go down as up.
Fool contributor Rich Smith does not own (nor is he short) shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 573 out of more than 170,000 members. The Motley Fool has a disclosure policy.
Motley Fool newsletter services have recommended buying shares of Illumina. Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.