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." 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.

Summer Street rains on Seattle Genetics' parade
"There's no such thing as bad publicity," goes the old saw. And if that's true, shareholders of cancer fighter Seattle Genetics (NAS: SGEN) should be dancing in the streets. Earlier this week, the stock was featured alongside peers Aastrom Biosciences (NAS: ASTM) , Regeneron (NAS: REGN) , and MannKind (NAS: MNKD) in a Seeking Alpha list of "15 biotech stocks being snapped up by company insiders." That same day, S-Gen also appeared in a second article (this time, on scoring the 10 most shorted stocks in biotech, alongside Savient (NAS: SVNT) and Avanir Pharma (NAS: AVNR) . Today, however, I'm going to take a look at Seattle Genetics' third appearance on investors' radar screens this week, when Summer Street Research initiated coverage of the stock yesterday ... and told investors to dump the stock.

S-Gen shares currently fetch $21 apiece, you see. But Summer Street sees them dropping to $12 within just a few months. If you think that's harsh, though, consider: Even at Summer's price target, S-Gen shares would cost 5 times book value, and 27 times sales. Those are valuations high enough to make Dendreon (3 times book and 11 times sales) look cheap! And you already know what I think about Dendreon's (NAS: DNDN) valuation.

Bull in a cancer shop
Mind you, this is not to say that Seattle Genetics doesn't have a bright future -- as a company. Indeed, just this past summer, S-Gen received permission from the FDA to begin marketing its Adcetris lymphoma treatment. The Fool's own Brian Orelli characterized the approval as "giving credence to the technology" and opening the way for S-Gen to continue developing and marketing more and more drugs based on its antibody-drug conjugates technology.

Here's hoping ... but optimistic as I am that S-Gen has opened a new -- and effective -- front in the war against cancer, I still can't justify the price investors are paying for this stock. I mean, does FDA approval mean sales will grow? Sure it does. But we're still talking about growth off a revenue base that's only $50 million strong, annually. And this is a company that's ...

  • Burning cash at a frenetic pace (more than $80 million in negative free cash flow over the past 12 months).

  • Not currently earning any GAAP profits at all.

  • Expected by most analysts to continue losing money for at least three more years.

  • Hoping to turn a profit in 2014 largely on the success of a drug that costs $108,000 per patient.

For the record, that's a price tag $15,000 higher than Provenge costs -- and I suspect you've heard how that pricing strategy worked out for Dendreon.

Foolish takeaway
Fools, the math here just isn't that complicated. At 48 times sales, and infinity times earnings-that-aren't, Seattle Genetics shares have a lot of investor hope built into their valuation -- but no guarantee that this hope will ever be rewarded. The shares may sell for 4 times Dendreon's P/S today, and 3 times its P/B, but ultimately, I expect Seattle Genetics will share Dendreon's fate.

My advice: Hold on if you're willing to accept the risk of a 65% drop. Take Summer Street's advice and sell if you aren't.

Disagree? Think Seattle Genetics will escape Dendreon's fate?Add it to your Fool Watchlist, and read along as it tries.

At the time thisarticle was published Fool contributorRich Smithdoes not own (or short) shares of any company named above, but The Motley Fool owns shares of Dendreon. You can find Rich on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 311 out of more than 180,000 members. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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