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." While the pinstripe-and-wingtip crowd is entitled to its opinions, down here on Main Street, we've got some pretty sharp stock pickers, too. And we're not always impressed with how Wall Street does its job.
Given that, perhaps we shouldn't be giving virtual ink to "news" of analyst upgrades and downgrades. And we wouldn't -- if that were all we were doing. Fortunately, in "This Just In," we don't simply tell you what the analysts said. We 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.
Bank of America's Merrill Lynch division just downgraded Dendreon (NAS: DNDN) to a solid "sell" rating, triggering a 5% plunge in the biotech's share prices. The price target was reset to $6 per share, down from $13. All told, the stock has lost (are you sitting down?) 84% of its value from the $39.52 high water mark it hit this past year.
Merrill's analyst team worries that demand for Dendreon's prostate cancer treatment, Provenge, may have settled at a surprisingly low level. This creates a "downside to valuation" and makes Merrill uncomfortable with Dendreon on both long-term and short-term time scales. It's a radical shift from the positive comments made from a different B of A analyst just weeks ago, saying that Dendreon's efforts to boost demand should "bear fruit" by the fourth (fiscal and calendar) quarter.
Merrill Lynch is hardly the first critic of Dendreon's prostate-fighting prospects. The stock comes with more "sell" ratings than "buy" recommendations these days. Wedbush underscored its bearish sentiment six weeks ago, noting that Johnson & Johnson's (NYS: JNJ) Zytiga drug may soon pull the rug out from under Dendreon's supposed star. Phase 3 trials of Zytiga showed significant improvement in progression-free survival and a trend toward overall survival as well.
All of that being said, Dendreon still has an active fan club. Deutsche Bank, for example, notes that Provenge could be used in conjunction with Zytiga rather than as a full-on replacement, meaning that both drugs could coexist in peaceful and profitable harmony. The final gavel on Provenge's efficacy compared to Zitiga shouldn't fall until the first half of 2013, Deutsche says. There are still more drug trials to muddle through here.
If Deutsche Bank is right, Dendreon could rebound something fierce from these ultra-depressed prices. But that's more of a gamble than a solid investment thesis unless you have inside information on how the Zytiga trials are working out.
Rating the raters
As it turns out, Bank of America has a major edge on Deutsche Bank in this sector. B of A sports 1,364 positive points in biotech with a respectable 59% accuracy, while the Germans stumble to 93 negative points and 45% accuracy. Both firms are overwhelmingly bullish on biotech stocks, but Merrill picks its winners with a more discerning hand.
And besides greater consistency, Bank of America's big winners tend to be, well, bigger than Deutsche's. The German best bullish bet is a 2008 call on Human Genome Sciences (NAS: HGSI) , which has gone on to beat the S&P 500 by 116 points since. But the Yankees have beaten that high-water mark with no less than six stocks, led by ultra-rare-disorder specialist Alexion Pharmaceuticals (NAS: ALXN) (nearly a six-bagger of outperformance) and cancer fighter Seattle Genetics (NAS: SGEN) , a 300-point market-beater.
In other words, Bank of America's analysts seem to have a better handle on the biotech sector than Deutsche's do. In this case, I can't blame you for taking the bearish advice and running away from Dendreon at full speed.
The Foolish takeaway
Sure, you might miss out on a fantastic turnaround if the bullish thesis plays out. But that's hardly a guaranteed outcome, and it depends on having patients, doctors, and insurance companies all accepting a two-drug therapy. That endgame is made all the harder by the fact that the more efficient Zytiga is given in pill form while Provenge adds cancer-fighting power to white cells of your own blood -- requiring one vein-tapping visit to the doctor followed by three reinfusions later on. Being tethered to a mix of pills and injections myself as an MS patient, I can tell you that needles just don't sit well with some patients.
So Dendreon is fighting a ton of headwinds here. Given Provenge's central importance to the company's value -- with or without takeover offers -- I find it hard to wax bullish over this stock. I'd keep an eye on fellow Fool Jim Mueller's Messed-Up Expectations portfolio to see whether Jim is ready to give up on Dendreon yet.
Dendreon is a gamble, but archrival Johnson & Johnson is a blue chip of the first order. Learn all about J&J's cash flows and dividend-boosting habits in this special report -- along with details on eight other super-powered payouts paired with rock-solid fundamentals. If nothing else, buying these stocks instead of Dendreon will help you sleep at night.
At the time thisarticle was published Fool contributorAnders Bylundholds no position in any of the companies mentioned. Check outAnders' holdings and bio, or follow him onTwitterandGoogle+. The Motley Fool owns shares of Johnson & Johnson and Dendreon.Motley Fool newsletter serviceshave recommended buying shares of Johnson & Johnson and creating a diagonal call position in Johnson & Johnson. We Fools don't all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter servicesfree for 30 days. The Motley Fool has adisclosure policy.
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