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.

Easy come, easy go
Well, that was fast. Shareholders of start-up flu vaccinator Novavax (NAS: NVAX) were treated to a modest bump in stock price yesterday, when the friendly analysts at Ladenburg Thalmann initiated coverage of their stock with a "buy" rating. Already today, these gains have evaporated -- not only that; but the stock's already dropped down below the pre-initiation price, and miles away from the $4 price target Ladenburg set for it. But why?

After all, there are all sorts of reasons to be optimistic about Novavax's chances. For example, earlier this year, fellow Fool Brian Orelli told us about a $97 million contract (with a potential to go to $179 million) that Novavax had won from the U.S. government. Concerned that traditional flu-vaccine manufacturers like Novartis (NYS: NVS) , GlaxoSmithKline (NYS: GSK) , and Sanofi (NYS: SNY) couldn't keep up with demand in the event of a pandemic outbreak, the feds were willing to place a small bet on Novavax's novel method of producing vaccine via insect cells.

As Brian wrote at the time, Novavax's proof of concept will take "years" to make it to market, and there's no guarantee that cash-burning Novavax will survive to profit from it. But recently, we've seen company insiders -- Novavax's CEO, CFO, and treasurer included -- also placing bets on the company's success. Big bets. Indeed, my Foolish colleague Rich Duprey described the insider activity as "a surfeit of insider buying."

Let's go to the tape
I guess it's no surprise, then, that Ladenburg Thalmann has decided to imitate the insiders and place a "buy" rating on Novavax as well. There's just one problem: Ladenburg Thalmann really isn't that great of a gambler when it comes to biotech stocks, betting on shares of such unprofitable startups as Zalicus (NAS: ZLCS) , XOMA (NAS: XOMA) , and Keryx Biopharmaceuticals (NAS: KERX) to outperform -- and losing:


Ladenburg Rating

CAPS Rating
(out of 5)

Ladenburg's Picks Lagging S&P by




64 points




85 points




58 points

Indeed, over the three years that we've been tracking Ladenburg's performance, this analyst has racked up an anemic record of just 39% accuracy in the Biotech sphere. Its record within Pharmaceuticals is even worse, with barely 35% of recommendations beating the market.

So call me a pessimist, call me a Fool -- but I have to wonder whether Ladenburg has laid another egg with its Novavax pick.

Incubating ideas at Novavax
Now, don't get me wrong. I'm not one of those folks who looks at Novavax's 48 price-to-sales ratio and dismisses it out of hand. Yes, that's an even higher P/S ratio than you'll find at any of the three Ladenburg losers named above -- but with the Department of Health and Human Services contract in hand, Novavax should see its sales soar to roughly $35 million per year.

If all works out as planned, this could easily push Novavax's P/S ratio down to a more modest level of about 5 times sales. What worries me more than the valuation here, though, is the company's cash situation. Novavax, you see, is currently burning cash at the rate of more than $32 million per year, a rate that's been pretty consistent over the last three years. I see the DHHS contract as helping alleviate that cash burn, but the average annual payout will do little more than keep Novavax's nose above water.

Foolish takeaway
Sure, the DHHS contract is undeniably "good news," but I don't think it's enough to transform Novavax into a profitable business. It's more a way for the government to leverage the money-burning efforts of private industry for public purposes, and maybe free up a few NIH scientists for other tasks. In short, although DHHS has probably guaranteed that Novavax won't "go away" for a few more years, I don't see the stock going anywhere fast, either -- and I don't see it going to $4 within a year.

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At the time thisarticle was published Fool contributorRich Smithowns no shares of the companies mentioned. You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 331 out of more than 180,000 members.Motley Fool newsletter serviceshave recommended buying shares of GlaxoSmithKline and Novartis. Try any of our Foolish newsletter servicesfree for 30 days. 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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