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.
And speaking of the worst ...
Like getting a character reference from Hitler, or a birthday card from Hugo Chavez, the receipt of a buy rating from a poorly performing analyst is a mixed blessing. Still hurting after last quarter's postearnings sell-off, however, Power-One
According to Auriga, there's a risk of "near-term volatility" as Europe scales back its big bet on solar power. Logically, this will depress demand for Power-One's devices that convert "direct current" solar power into usable "alternating current" (the AC/DC of heavy metal fame). But this volatility, says Auriga, just paves the way for more profits going forward. Ultimately, it's coal-polluted China and sunny Stateside that offer the greatest opportunities for solar power growth. Sometime around 2H 2011, Auriga expects to see demand there (and here) revive, leading to "increasing industry sales" and greater earnings visibility.
But ... is Auriga right?
Let's go to the tape
Seeing as I've already put my reputation on the line, arguing Power-One is a bargain -- I sure hope Auriga's right on this one. However, the facts suggest otherwise. Consider for a moment Auriga's rather checkered past elsewhere in the solar industry, where the analyst has scored some successes ...
|
Company |
Auriga Said |
CAPS Says |
Auriga's Picks Beating S&P by |
|---|---|---|---|
|
JA Solar |
Outperform | ***** | 60 points |
|
Solarfun Power |
Outperform | *** | 33 points (picked twice) |
|
Applied Materials |
Underperform | **** | 5 points |
Company | Auriga Said | CAPS Says | Auriga's Picks Lagging S&P by |
|---|---|---|---|
| Trina Solar | Outperform | ** | 16 points |
| First Solar | Outperform | ** | 16 points |
| Yingli Green Energy | Outperform | **** | 26 points |
... and overall come away with a record that lags the market significantly. Historically, only 22% of the company's semiconductor recommendations (solar panels are semiconductor-intensive) outperform the S&P 500's returns. Within the electrical equipment industry, the record's twice as good -- but still pretty bad -- at just 44% accuracy.
Off to a "slow" start
To say Auriga's performance in the solar industry "needs improvement" is an insult to every student who's ever earned a D average in school. And yet, try as I might, I just cannot fault Auriga's reasoning on this week's pick. Literally every number I see at Power-One is telling me the stock's every bit the "buy" that Auriga says it is:
- The company's projected long-term growth rate of 26% -- a number much higher than needed to justify Power-One's modest 15.4 P/E ratio.
- The "E" in that P/E ratio itself -- which appears to be of very high quality, inasmuch as actual free cash flow clocked in at $156 million over the past 12 months, exceeding reported net income by a factor of 56%.
- And of course there's the balance sheet -- filled to bursting with Power-One's copious cashflows, and brimming with nearly $195 million, versus less than $40 million in debt.
Foolish final thought
Make no mistake -- I'm nervous as all get-out to find myself on the same side of this argument as an analyst of Auriga's "caliber" (about a .22 shell casing, and light on the gunpowder). But with Power-One growing like gangbusters, and selling for a price-to-free cash flow ratio of only 7.5, I simply cannot help but love this stock at today's price.
