This Just In: 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." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.

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.

Andale! Andale! Auriga! Auriga! Buy solar stocks!
Is it finally time to re-board the alternative energy train? Are solar stocks once again (ahem) "hot?" Apparently so, or at least, it seems apparent that Auriga Securities thinks so, as the Spanish-owned firm with the funny name leaps into the solar-heated pool with both feet (and as we'll see, holding its nose ever so daintily).

Yesterday, Auriga U.S.A. initiated coverage of eight (count 'em, eight) separate solar names. Trina Solar (NYSE: TSL), Solarfun (Nasdaq: SOLF), and Yingli Green Energy (NYSE: YGE) all earned bright shiny buy ratings from the firm. Suntech (NYSE: STP), JA Solar (Nasdaq: JASO), Canadian Solar, and First Solar (Nasdaq: FSLR) each got a pat on the head and a "hold" rating, while Auriga turned up its nose at only one name in the sector: SunPower (Nasdaq: SPWRA).

Why does SunPower get the boot? Simply put, Auriga doesn't trust the company's use of pro-forma accounting in its earnings reports (and for good reason). Meanwhile, Canadian Solar gets benched in spite of putting forth trustworthy numbers (that the analyst believes suggest lower profit margins ahead); JA Solar lacks the capacity to support "meaningful EPS growth in 2011"; while Suntech is "fairly valued … but we are lacking a catalyst" to move the shares up.

So far, so good
And I have to say that so far as the above goes, I agree with Auriga's conclusions. Not necessarily on the details, but on the big picture. None of SunPower, Suntech, JA Solar, or Canadian Solar attract me. (And especially not Sunpower.)

And so what?
But never mind what I think. Why should you care what Auriga thinks? After all, having just initiated coverage, Auriga lacks much of a track record in this industry -- and what little record it does have is iffy at best. Within the Semiconductors and Semiconductor Equipment industry that solar stocks inhabit, Auriga currently boasts a record of 58% accuracy on its picks. It's guessed wrong on such high-profile picks as:

And this is where the story gets really interesting. Auriga's handed out ringing endorsements to three stocks this week:

• Trina -- "the most underappreciated Chinese solar company we follow," and one that Auriga expects to win "additional upside in 2H10 should demand materialize stronger than current expectations."
• Its twin Yingli, which Auriga says "rivals Trina as the lowest cost producer."
• And Solarfun, where Auriga believes investors are worrying too much about "over-hyped and expected drop-off in 2H10 German sales."

Yet Auriga withholds its stamp of approval from First Solar: "We believe the consensus is overestimating 1H revenue while underestimating 2H revenue." Consequently, when "actual results … fall short of the Street estimates," Auriga expects the stock to suffer.

Read my mind
You can probably guess where I'm going with this. Auriga has put First Solar on hold until the short-term bad news passes, and it will only upgrade the stock afterwards, hoping to capitalize on the firm's longer-term prospects. But … won't investors look ahead and bid up shares in anticipation of these very same prospects?

Moreover, I see First Solar as having much in common with one of Auriga's faves in the industry, Solarfun. Like Solarfun, it's one of the few solar stocks currently generating positive free cash flow from its business. (A benefit none of the other stocks on today's list can claim.) Unlike Solarfun, though, First Solar has managed to complete this feat in each of the past two years -- whereas Solarfun is relatively new to the concept of earning cash money from selling solar cells and modules.

Foolish takeaway
Put it all together, and I have to say that I'm leery of Auriga's endorsements this week. The only one that holds water, it seems to me, is the prediction that Solarfun (at 7.8 times free cash flow, with a projected five-year 12% annual growth rate) will outperform.

But I also believe Auriga is selling First Solar short (figuratively speaking). In an industry where so few of its peers are capable of "showing us the money," there's a lot to be said for a company that has done just that. Twice, for two years running. First Solar may not be the cheapest stock on the market today -- but within the solar industry, it looks to me like the one likeliest to shine.

And yet, First Solar's stock has lagged the market badly over the past year. How do you tell a bargain stock from a value trap? Find out here.