Good Riddance, First Solar

This article is part of our Rising Star Portfolio series.

When I sold First Solar (Nasdaq: FSLR  ) from the real-money Rising Star portfolio I'm managing for Fool.com in March, one reader commented, "Considering FSLR has fallen to almost nothing, I think that getting out now is like saying you'll get out of the car AFTER it has driven off the cliff." Although I could see that point, I had simply come to the conclusion there was still plenty of room for free fall after months of mounting red flags at First Solar.

Here's another shoe that's dropped for the solar company. GMI Ratings has issued an update on First Solar, tagging it with the serious "Very Aggressive" Accounting Risk rating, its highest litigation risk red flag. The organization, which provides global corporate governance and environmental, social, and governance (ESG) research, points out that First Solar's risk profile has been heating up for quite some time.

Since 2008, First Solar's accounting risk has dropped from "average" to "very aggressive." Meanwhile, in March, a lawsuit was filed accusing certain of the company's officers and directors of having "issued knowingly false and misleading statements" that have left the company's financial statements "materially false and misleading."

The specter of overly aggressive or "creative" accounting has definitely been rearing its ugly head recently, although one would have liked to have thought such problems ended with Enron. Groupon's (Nasdaq: GRPN  ) recent "math problems" show that investors aren't out of the woods yet when it comes to this sort of risky business.

GMI's issues with First Solar don't end there, either. They've awarded the company a lackluster average "C" grade for ESG issues, and the organization believes there's a 37% likelihood of class action against the company.

In retrospect, I regret having been distracted by the promise of solar power and the beaten-down stock price (First Solar shares sure did look cheap) and missing some red flags that surely were already there when I originally purchased the stock last September. I also regret not making the sell decision sooner.

What I don't regret is a factor I still believe in, and that is that alternative energy is going to become more important -- and more lucrative for investors -- going forward. I still have high hopes for algae biofuel play Solazyme (Nasdaq: SZYM  ) , for example, although granted, my first purchase was arguably too early. Of course, part of my high hopes relate to the fact that Solazyme's products aren't just used for fuel; they can be used in food and beauty products, too. It's a pretty well diversified line for an early stage company.

I'll still be on the lookout for more promising alternative energy stocks. Overall, though, I'm struck by the fact that we investors need to be more careful than ever, and foster a willingness to reassess whether our original investment theses were wrong on certain stocks. I feel burned by my ugly negative return on First Solar (fueled by my own high hopes for solar), but I believe there was a point when the right thing to do was to stop being stubborn and simply get out of the sun.

If you're looking for new, rule-breaking stocks that take advantage of forward-looking technologies, be sure to check out our free report "Discover the Next Rule-Breaking Multibagger."

Alyce Lomax owns shares of Solazyme. Motley Fool newsletter services have recommended buying shares of First Solar. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (12) | Recommend This Article (9)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 03, 2012, at 4:06 PM, lemoneater wrote:

    We've all gotten sunburnt at one time or another by overly optimistic picks. (My resident science advisor i.e. my husband told me to avoid the solar sector because he doesn't feel that the efficiency of solar panels demonstrated in the lab in perfect conditions always makes it outside in the real world.)

    I appreciate the transparency you show in looking for the flaws in your pick.

  • Report this Comment On April 03, 2012, at 4:12 PM, GameCrazyFool wrote:

    i just sold today, i also bought in because i thought the stock was way too cheap. incurred a loss of 40% or $2000. never going to make this same mistake.

  • Report this Comment On April 03, 2012, at 4:17 PM, clanza875 wrote:

    So the reason you sold is that the price went down? Seems counterintuitive

    BTW whenever a stock goes down 90% frivolous lawsuits come out

  • Report this Comment On April 03, 2012, at 6:18 PM, TMFLomax wrote:

    Thanks lemoneater and GameCrazyFool... and lemoneater, you are really fortunate to have a resident science advisor! I know one of First Solar's recent issues has been the hint of some degradation in hot conditions... (ugh) -- sounds quite along the lines your husband talked about.

    clanza875, no, the reason I sold is not that the price went down. If that were the only reason I would sell, I would have also sold ENOC and IFSIA and SZYM (in SZYM's case, I bought more later). FSLR, on the other hand, had many, many red flags that I described in my sell article (which I linked to here). GMI's new rating just makes me feel that I'm glad I went ahead and got out of this one. I think part of the point here is that there is a point when you have to reassess whether the original thesis was correct, has changed, and whether the situation could get worse, which I think FSLR's could.

    Best,

    Alyce

  • Report this Comment On April 03, 2012, at 6:31 PM, TheDumbMoney wrote:

    clanza, I think Alyce sold because she realized her original thesis was flawed, not because the stock price went down. Her only real mistake here probably was continuing to hold the stock for an undetermined amount of time after she realized the buying thesis was flawed, which she likely did either for emotional reasons or otherwise out of a desire not to admit error. We all have made that mistake at some point.

    I concur however that I don't need GMI to tell me a lawsuit is likely. Stock drops like this always generate class action derivative claims, which are primarily designed to make the attorneys wealthier. Alyce, tell me how you/Fool make out when FSLR settles that suit! (Don't hold your breath.)

  • Report this Comment On April 03, 2012, at 6:31 PM, TheDumbMoney wrote:

    Nevermind, Alyce responded while I was delayed in posting my comment.

  • Report this Comment On April 03, 2012, at 6:35 PM, TMFLomax wrote:

    Thanks dumberthanafool! You're right on -- and yes, you're both right that lawsuits are frequent on stock drops. I guess with me sometimes it depends on whether I have a really bad feeling about a lot of the other stuff that's seemed to be going on with a company... which is how I'm feeling about FSLR these days.

    Alyce

  • Report this Comment On April 03, 2012, at 6:39 PM, devoish wrote:

    News to watch. http://www.energyefficiencynews.com/articles/i/4959/

    I still believe that solar is a great investment if you put it onto your roof, instead of into your portfolio. Which means it will eventually be good for your portfolio too.

    Best wishes,

    Steven

  • Report this Comment On April 04, 2012, at 10:16 AM, coltsfanterry wrote:

    having worked for First Solar,even befor Wal-Mart bought them,it is not suprising they are looking bad.the front office is bloated and very unknowledgeable in the whole industry.their only purpose was to make themselves as rich as fast as they could.new,responsible leaders are the only way First Solar will survive.

  • Report this Comment On April 04, 2012, at 10:43 AM, TMFLomax wrote:

    Steven, thanks for chiming in -- I totally agree with your statement there. Regardless of all the ugliness going on in that industry, the GOOD part is that solar is becoming more financially accessible for more people. I heard the rumor that SolarCity might go public (haven't looked into what's happened since I first heard it), and at this point, I'd think that one might be a more sound investment than these others, which are getting taken to the woodshed given the competition with Chinese solar companies, government subsidy problems, etc. And of course, I feel that FSLR has terrible problems that are specific to itself and its management... But I'd love to have solar on my roof!

    Alyce

  • Report this Comment On April 06, 2012, at 2:59 PM, cattywampus wrote:

    Thanks for the follow up on a stock and experience that many would just like to forget. I for one think that you often times learn more from your mistakes than your victories. Given that solar still has a bright future and the Chinese flood of panels played a part in the industry decline, I'm looking forward to your future recs in the alternative energy sector. It has been tempting to get into FSLR at these prices but your article has given me pause, thanks again.

  • Report this Comment On April 06, 2012, at 3:05 PM, cattywampus wrote:

    Some interesting ideas on alternative energy from Jeremy Rifkin on the Charlie Rose program.

    http://www.youtube.com/watch?v=Ppw5O-Vtxcs

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