This Just In: Upgrades and Downgrades

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 track the
long-term performance of Wall Street's best and brightest -- and its
worst and sorriest, too.

And speaking of the worst ...

What do
you do when you learn that one of the stocks you own has just been
downgraded by a famous Wall Street analyst? If you're like me, your
first reaction is probably to panic -- somebody, somewhere, knows
something you don't! But if you're also like me, then the next thing
you do is find out who issued the downgrade, then click on over to Motley Fool CAPS and find out if they know what they're talking about.

Which is one reason why I'm not worried by yesterday's downgrade on Intuitive Surgical (Nasdaq: ISRG).

On Tuesday, as you probably know by now, San Franciscan investment banker JMP Securities slashed its rating on the robotic surgeon to "market perform." Now, we don't know why JMP has gone suddenly cold on the stock -- not a single major media outlet has details on the downgrade. What we do know, though, is that when JMP speaks, people ... probably shouldn't listen.

The bad ...

Over the two years that
we've been tracking JMP here on CAPS, we've watched this analyst
develop a record of rare mediocrity. Nearly 55% of the time this banker
tells you a stock will outperform or underperform the market, it
doesn't do anything of the sort. You don't have to look far to find
examples of JMP's mistakes in the medical sphere:

The good ...

On the other hand ... we're talking surgical robots
here, right? So in all fairness, I should point out that from time to
time, JMP does in fact call a pick right both in biotech -- and in
hi-tech:

... and the ugly

That said, I should also
point out the most relevant JMP pick of them all -- its April 2008
upgrade of Intuitive Surgical to "market outperform." Wanna guess how
that one went?

Yep. Even after the stock's remarkable 40% run-up over the past few
weeks, JMP still managed to find a way to lose money on Intuitive. By
the time it closed out its position yesterday, that pick was lagging
the market by 22 points.

Ouch!

Yep, it took rare talent
indeed to lose money on Intuitive. And yet -- and don't faint from
shock when I tell you this -- the simple fact of the matter is that I
believe JMP is finally right this time.

Listen, JMP was clearly off its rocker when it predicted last April
that Intuitive would command an 80 P/E and sell for $400 a share within
the year. I said so then (and I was right), just as I also said the stock looked bargain-priced
four months ago when I put the thumbs up in CAPS (and so far, I've been
right again). But now that the stock's run up past $140, it's time to
count your winnings, or cut your losses (as JMP is doing).

Why? Because based on its most recent results, Intuitive's free cash
flow for the last 12 months has amounted to $246 million. This gives
the stock a 21.4 price-to-free cash flow ratio (meaning that it's
cheaper than its 27.2 P/E makes it seem). Relative to 21%
analyst-expected average five-year growth, this price seems reasonable
-- but it's no longer a bargain.

Foolish takeaway

Based on its current
valuation, I fully expect Intuitive to hold onto its gains -- it's
earned them. Therefore, JMP's downgrade to the equivalent of a "hold"
rating seems logical to me. However, in order for Intuitive Surgical to
outperform the market from here, it's going to have to beat all expectations for future growth.

My advice? Hope for it, but don't bet on it.

© 2009 UCLICK, L.L.C.