This Just In: Upgrades and Downgrades
By Rich Smith (TMFDitty)
March 15, 2007
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'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 ...
One day after gene analyzer Affymetrix (Nasdaq: AFFX) won a stunning legal verdict against rival Illumina (Nasdaq: ILMN), the former received a welcome bonus -- a pair of analyst upgrades to its stock.
On Wednesday, both Leerink Swann and Robert W. Baird blessed Affymetrix with their approval, each upgrading the stock from "neutral" equivalents to "outperform." The value of the jury verdict, which awarded Affymetrix a 15% royalty on $111 million in revenues booked by Illumina from 2002 through 2005, is obvious. But even better, Baird opined that "if we assume 15% as the forward royalty rate, then Affymetrix stands to benefit from Illumina's current high-growth potential." Good news indeed -- although it's worth pointing out that Illumina is appealing the award.
Still, quite often in situations such as these, the parties agree to settle their differences after the verdict is in. The victor, Affymetrix, holds the upper hand, of course. But even so, in persuading its foe to settle the dispute and pay up immediately, the winner is often forced to accept something less than the jury was willing to give it. Weighing that risk, one wonders whether the analysts jumped the gun on this one, or whether Affymetrix's position is so strong that 15% royalties for all eternity are indeed a possibility. To get a better handle on, well, how good a handle the analysts have on matters, let's check their records on CAPS.
There, we see that both of these firms are stars, even if Baird shines a bit less brightly. While Leerink places in the top 10% of Wall Street firms with its CAPS rating of 99.03, Baird falls short of that mark, scoring "just" a 92.01 rating, which is still pretty darn good. One key to Leerink's success may be its focus on a single field of equity analysis: health care. Judging from the very few picks it's made that we've been able to track on CAPS, another strength may be its focus on stocks it knows well. With only 11 positions on its scorecard, all but two of Leerink's calls are beating the market. For example:
Company Leerink
Says:
CAPS
Says
(5 stars
max):
Leerink's
Pick
Beating
S&P by:
GTX (Nadsaq: GTXI)
Outperform
*
130 points
Omrix Biopharmaceuticals (Nadsaq: OMRI)
Outperform
****
70 points
Applera (NYSE: CRA)
Outperform
*
2 points
Of course, while a more diverse shop, Baird has picked a few health-care winners of its own:
Company Baird Says:
CAPS
Says:
Baird's Pick
Beating S&P by:
Obagi Medical (Nasdaq: OMPI)
Outperform
*****
34 points
Array Biopharma (Nasdaq: ARRY)
Outperform
**
22 points
Long story short, both of these firms seem to know what they're talking about when picking stocks. Their records, combined with the self-obvious good news of Affymetrix's court victory, and the fact that the Fool's own Karl Thiel recommended Affymetrix to members of our S&P-walloping Rule Breakers newsletter, have me thinking that "buy" is indeed the right call to make here. |
