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.

Two cheers for SunPower
Shareholders of beleaguered solar play SunPower (Nasdaq: SPWRA) cheered on Friday, as two of Wall Street's leading lights took a shine to its stock. Both top-20%-rated Raymond James, and top-ten-percentile analyst Soleil Securities closed out the trading week with a bang, gracing SunPower with a pair of upgrades to "buy." (Actually, Raymond James said "outperform." Same difference.)

While it's true that SunPower "has pushed earnings expectation for 2010 deep into the back half of 2010," and is depending on Q4 alone to provide "roughly 80% of its earnings for 2010," Soleil argues that this earnings risk is fully baked into SunPower's stock price. Thanks to investor pessimism, the company now sports "one of the lowest EV-to-EBITDA multiples in the solar sector," and sells for a discount to tangible book value of $10.70.

Similarly, the stock's steep 58% year-to-date decline caught Raymond James's attention. While it's not thrilled to see that SunPower's "highly elevated fixed cost structure" eats up "more than three-quarters of gross profit and [resulted] in a 2010 operating margin below 4% (one of the lowest among peers) and de minimis GAAP earnings," Raymond James is feeling its oats now, and argues that "a contrarian perspective might be useful" at this point.

Both analysts are wrong. SunPower is not a buy.

Let's go to the tape
Raymond James's opinion, we can quickly dispose of. The analyst has only a spotty record of public picks, with a bare dozen recommendations captured by CAPS over the past couple of years. So while the analyst was right in recommending semiconductor play Texas Instruments two years ago (solar stocks use semiconductors to convert light to electricity), that single pick doesn't suffice to qualify the analyst as a "solar expert."

In contrast, Soleil does have a record. It's just not very good: 

So yes, the last time Soleil recommended taking an action on SunPower (i.e. selling it), the analyst was right. Kudos. And it's done well in considering both a buy and then a sell of First Solar. But overall, I can't help but notice that half of this analyst's solar industry picks are trailing the market pretty badly. Soleil was right to advise selling SunPower when it told investors to do so last year -- and it's still right to sell SunPower today.

Sunny skies, but a drought of profits
Why am I so down on SunPower? I laid out a few reasons for my pessimism in a column earlier this month, discussing a similar buy recommendation from CAPS ne'er-do-well analyst Ardour Capital. (The stock's down 20% from where Ardour picked it, by the way.)

Basically, I said at the time that SunPower carried a hefty debt load -- roughly five times its annual earnings before interest, taxes, depreciation, and amortization (EBITDA). While that burden's roughly equivalent to the debt borne by rivals Suntech Power (NYSE: STP), LDK Solar, and MEMC, it puts the company at a significant disadvantage when competing with the less leveraged Trina (NYSE: TSL), Applied Materials, and First Solar.

And how did SunPower get so deep in hock to its creditors? The company hasn't generated a penny of free cash flow. Ever.

Foolish final thought
Now, Soleil and Raymond James may believe that's not significant. They may think the stock has fallen so far it just has to bounce back. They may have faith that the company will suddenly turn itself around in Q4 and end the year in the black. I say none of that matters a whit until the company proves that it has mastered the essentials: the ability to make stuff, sell it, and collect cash for it.

SunPower can't. Until it proves it can, I won't buy it.