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. 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.
First Solar dims
It's Day 2 after the downgrade for First Solar (NAS: FSLR) investors, and the damage is only getting worse. Yesterday, Goldman Sachs cut its price target on America's leading solar company to $150 -- a 14% markdown from the previous $175 target. The reaction was swift and deadly -- investors subtracted 5% from First Solar's market cap, which, according to Marketwatch, made the stock the second-worst performer on the Nasdaq, after Dell (NAS: DELL) .
That's quite an insult, coming from the company that had made First Solar a "conviction buy" as recently as January. According to Goldman, though, this isn't personal -- it's just business. Explains the analyst: "We are adjusting price targets across our Americas Clean Energy coverage to reflect a higher risk premium given a less-certain global macroeconomic environment." Yet First Solar was the only stock in the industry that Goldman downgraded yesterday.
Let's go to the tape
Of course, the real question today is whether you should care what Goldman thinks at all. I mean, Goldman was wrong that First Solar was a great buy back in January, after all. The stock's gone nowhere but down, all year long -- and First Solar isn't the only solar stock where Goldman's goofed.
CAPS Rating (out of 5)
Goldman's Picks Beating (Lagging) S&P by:
SunPower Corp (NAS: SPWRA)
JA Solar (NAS: JASO)
Fact is, Goldman's batting only about .375 across the seven picks it's made in the alt-energy space over the past few years. That's a good record in baseball ... but not so hot for a stock picker. It's also worth pointing out the extreme wishy-washiness of Goldman's move yesterday. Goldman no longer has "conviction" that First Solar is a "buy" -- yet the analyst is still telling people the stock's worth $150 a share -- or about 50% more than it costs today. As for the actual "rating" the analyst assigns, Goldman classifies the stock as "buy/neutral."
Pick a lane, Goldman
So which is it, Goldman? "Buy"? Or "neutral"? Is the stock going up 50% or isn't it? That's what you, Fool, want to know -- and that's what we're here to decide. Now, I think I can see why Goldman believes the stock has upside -- I'm just not sure it's right.
Here's why: To begin with, First Solar looks relatively inexpensive at a P/E ratio of just 16.6. That's not as cheap as some of the Chinese operators, like Yingli Green Energy (NYS: YGE) , Suntech (NYS: STP) , or JA Solar -- all of which sell in the low-single digits for P/E. However, 16.6 is a smaller number than the 20% growth rate most analysts expect to see out of First Solar over the next five years. If you're a simple PEG ratio investor, I can see the attraction here.
But here's the problem: That P/E is basically meaningless when a company isn't able to generate the kind of cash necessary to back up its reported net earnings. And lately, First Solar hasn't been able to do anything of the sort. Over the past 12 months, for example, at the same time First Solar was reporting more than half a billion dollars' worth of GAAP "profit," the company actually burned $388 million in cash.
I think that at its current cash-burn rate, First Solar has a little over a year in which to get its act together and start producing cash to match its supposed profit. After a year, the company's cash reserves should be just about used up, requiring First Solar to either take on additional debt (it already has more than $360 million in IOUs piled up) or dilute its shareholders with a new share issuance.
Will the company succeed? I don't know. A year is quite a long time, and I wouldn't put it past First Solar to fix what ails it and return to its historical cash-generating ways. On the other hand, I'm not about to pull a Goldman and promise you that the stock will rise 50% in price on hopes of a maybe-turnaround. My advice would be to put this stock on a shelf for now and check back later to see whether it's improved in a few quarters. Thanks to today's renewed sell-off, there are just too many good investment ideas out there, to waste time on a maybe.
At the time thisarticle was published Fool contributorRich Smithdoes not own (or short) any company named above. You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 428 out of more than 180,000 members.Rich's concerns notwithstanding,Motley Fool newsletter serviceshave recommended buying shares of First Solar. 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.
Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.