This Just In: More 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." 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.

Burnt by the sun?
There's no two ways about it: 2011 has not been kind to solar stocks. Since the year began, shares of industry leaders First Solar (NAS: FSLR) and Suntech Power (NYS: STP) are down 34% and 55%, respectively. Second-tier players such as Trina Solar (NYS: TSL) and Yingli Green Energy (NYS: YGE) have been hit even harder, down 65% and 69%, respectively. Meanwhile, more speculative companies like Evergreen Solar and Solyndra have suffered the ultimate indignity -- actually declaring bankruptcy. Yet according to one analyst, this solar flame-out may actually be giving us an opportunity to own a quality solar shop for a discount price.

The analyst making the call? Auriga Securities. And its favorite stock? SunPower (NAS: SPWRA) .

The case for solar power
According to Auriga, SunPower shares that are priced at $12 today could appreciate 25% within a year, rising to $15. The analyst sees two catalysts leading to this happy result: First, majority SunPower shareholder Total (NYS: TOT) is supporting a move to eliminate the difference between SunPower "A" and "B" shares, creating only a single class of shares in order to "resolv[e] a market anomaly and address investor confusion." This doesn't really change the character of the shares, granted, as both classes are currently voting stock -- but it should give a lift to the lower-profile "B" shares, boosting SunPower's overall market cap.

More fundamentally, Auriga commends SunPower for moving to "undertake a major restructuring" by year-end in hopes of improving the company's cost structure -- and improving profit margins as well. When you consider that SunPower today earns even less profit than it was earning five years ago, I suspect most shareholders will applaud this move -- but the real question is: Should new investors follow Auriga's advice and buy the stock based on the hoped-for improvements?

Let's go to the tape
Apologies in advance for any bubbles I'm bursting here, but my answer has to be "no."

Why not? Because based on its record, there's really no reason any investor should take Auriga's advice on, well, anything. Consider: According to our records on CAPS, where we've been tracking Auriga's performance for more than two years now, this analyst really doesn't have a very good handle on solar investments. Its record in the Semiconductor industry, for example, which includes such solar suppliers as MEMC Electronic (NYS: WFR) , Trina, and ReneSola, stands at an underwhelming 36% for accuracy. In Electrical Equipment, where companies such as First Solar and SunPower are grouped, Auriga has done even worse -- getting only 23% of its recommendations right.

In short, the correct reaction for an investor hearing that Auriga has upgraded his or her stock is almost certainly to place hands over ears and run as far away as possible. Quickly. And perhaps screaming in terror.

SunPower: SPF 1000 recommended
What's more, the numbers I see at SunPower today do nothing to change my opinion. As I mentioned, SunPower's not exactly a profits powerhouse. Its $22 million in trailing-12-month profit means this $1 billion market-capped company costs nearly 47 times annual earnings. And that's not even counting the debt.

Worst of all, that's not even the bad news. The bad news is that judging from its cash-flow statement, even the meager profits SunPower claims on its income statement are vastly overstated. True free cash flow at this company has proved elusive over the past several years. SunPower briefly reported FCF-positivity last year, but it quickly plunged back into the red and, at last report, was burning cash at the rate of $155 million annually.

Foolish final point
Fools, that's not the kind of company I want to invest in -- and if truth be told, even Auriga seems to have reservations about its latest "buy" recommendation: "In our view, SunPower stock will have investment appeal only on tangible/sustained progress on the cost front. Until such time it will be at best a trade."

I agree. And the right trade to make is: "sell."

At the time thisarticle was published Fool contributorRich Smithowns no shares of any company named above. You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 395 out of more than 180,000 members.The Motley Fool owns shares of First Solar.Motley Fool newsletter serviceshave recommended buying shares of Total and 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.

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