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." The pinstripe-and-wingtip crowd is entitled to its opinions, but we have some pretty sharp stock pickers down here on Main Street, too. And we're not always impressed with how Wall Street does its job.
So 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.
Today, it seems most of what these analysts are talking about is health care, and the companies that play a role in it. Our featured stocks today include pharmacy benefits providers Express Scripts and CVS Caremark (NYS: CVS) , both returned to the "buy" column this morning, but also Gilead Sciences (NAS: GILD) (upgraded), and Human Genome Sciences (NAS: HGSI) (down). Let's find out what's going on here, beginning at the bottom.
Human proves mortal
Human Genome Sciences succumbed to a downgrade from Summer Street Research this morning. That sounds like bad news, but really, it was only to be expected. Yesterday, Big Pharma behemoth GlaxoSmithKline (NYS: GSK) finally sealed the deal on its bid to purchase HGS, agreeing to pay $14.25 per share to acquire the company.
Considering that HGS shares currently fetch $14.21 on the open market, or 99.7% of the agreed purchase price, there's precious little upside left in the stock. For investors who had the foresight to buy it at its lows in April, it's time to take your nearly 100% winnings and call it a day. In contrast, long-term shareholders who've suffered through the stock's nearly 40% drop over the past 52 weeks can only lick their wounds today and hope for better luck next time. This game is pretty much over.
The future is Sciences
Continuing with our theme of companies that practice science, Gilead Sciences went the other way today, buoyed by a new buy rating from Maxim Group.
Maxim says Gilead, priced just below $53 today, is headed for $70 within the next year. While that sounds optimistic, it's really not out of the realm of the possible. Gilead shares cost less than 16 times earnings, after all -- a relative bargain in the biotech industry, where earnings multiples tend to cluster north of 20. What's more, Wall Street estimates suggest that Gilead is capable of 16.5% long-term earnings growth -- a rate that's faster than the industry average.
When you consider further that Gilead is a star performer not just its industry, but among stocks in general, in that it generates free cash flow ($3.1 billion) superior to reported net income ($2.6 billion), I see every reason to want to own Gilead today, and little reason to avoid it. In fact, the numbers on this one look so good that I think I'll pick it myself.
Just as soon as I finish up this column, I intend to head over to Motley Fool CAPS and rate Gilead an "outperform." Want to see how the pick works out? I'm kind of curious, too -- so let's watch the story play out together, in full public view.
I want a new drug (provider)
And now we'll end today's column with a couple of pharmacy benefits management (PBM) picks, courtesy of JMP Securities, which just resumed coverage of both Express Scripts and CVS Caremark.
Respectively, Express Scripts and CVS are the No. 1 and No. 2 providers of drugs to patients enrolled in corporate and other health-care plans in America, buying drugs in bulk from Big Pharma and then making sure they get to the patients who need them (and collecting some profits along the way). JMP likes both companies and this morning resumed coverage of each with a "market outperform" rating -- but honestly, I don't see the attraction.
Priced at 18 times earnings and 13 times free cash flow, CVS looks only fairly valued based on consensus analyst predictions of 12% long-term earnings growth. Express Scripts' numbers aren't any better. Valued on GAAP earnings, the stock carries a P/E ratio of 23. Even if you give Express Scripts the benefit of the doubt, though, and value it on FCF rather than GAAP earnings, the ratio only drops to 20. That's a fair price relative to consensus estimates of 18% long-term growth, but I'd hardly call it a bargain -- or a guarantee to "outperform" the market.
Long story short, while I don't believe you'll go broke investing in either of these stocks, neither one gets my vote as the best stock pick of the day. (That would be Gilead.) And if you want to see which stock gets the highest marks from the Fool's analytical team, read our new report (downloadable for free), and find out which company is The Motley Fool's Top Stock for 2012.
Whose advice should you take -- Rich's, or that of "professional" analysts such as Summer Street, Maxim, and JMP?Check out Rich's track record on Motley Fool CAPS, andcompare it with theirs. Decide for yourself whom to believe.
At the time thisarticle was published Fool contributorRich Smithowns no shares of, nor is he short, any company named above. The Motley Fool owns shares of Express Scripts.Motley Fool newsletter serviceshave recommended buying shares of Express Scripts and Gilead Sciences. 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.