Wednesday's Top Upgrades (and Downgrades)

This series, brought to you by Yahoo! Finance, looks at which upgrades and downgrades make sense, and which ones investors should act on. Today, our headlines are focusing on alternative energy stocks.

Feb 19, 2014 at 9:03PM

This series, brought to you by Yahoo! Finance, looks at which upgrades and downgrades make sense, and which ones investors should act on. Today, our headlines are focusing on alternative energy stocks, as Capstone Turbine (NASDAQ:CPST) scores an upgrade, but Waste Management (NYSE:WM) and SolarCity (NASDAQ:SCTY) are both downgraded

Huh? Why Waste Management?Capstone Turbine does small-scale natural gas turbines, and SolarCity leases solar power installations to consumers -- both obvious alt-energy plays. But if you're wondering how Waste Management got into this column, remember this: Through its initiatives to capture methane gas (for fuel) from landfill waste, Waste Management has become nearly as big a producer of "alternative energy" as the entire solar power industry, combined.

This is a clever business niche that Waste Management has created for itself, no doubt. But it's apparently not as profitable as investors might hope. Yesterday, the company reported earning $0.56 per share in its fiscal fourth quarter, $0.04 below analyst estimates. Revenue also came in light. Worst of all, Waste Management warned that this year's earnings will almost certainly fall short of the consensus estimate of $2.41 per share.

Responding to the news, Wunderlich Securities downgraded Waste Management shares to hold today, noting that the stock was up strongly in 2013 but has little chance of rising further this year: Waste to energy "and Recycling remain margin and FCF drags," Wunderlich warned, "they actually underperformed expectations in 2013 and are not expected to be better than flat y/y in 2014." Absent a divestiture of the company's green energy business, the analyst sees little reason to own the stock -- and I agree. 

Priced north of 16 times free cash flow (and even more expensive when valued on generally accepted accounting principles earnings), but expected to grow these earnings at only about 3% annually over the next five years, Waste Management stock is clearly overpriced. Wunderlich is right to downgrade it. The only thing I'm "wundering" is if it shouldn't perhaps downgrade the stock even farther.

Sun setting on SolarCity
Speaking of egregiously overpriced stocks, consider Elon Musk's SolarCity. Baird just downgraded this one on fears that "the current valuation prices in much of its growth/execution." Quoted on this morning, Baird worried that "execution through 2017 is largely priced into the stock," suggesting investors today could be waiting years before they see a profit on their investment. But I wonder if any profit will ever result.

Unprofitable in four out of the past five years, SolarCity has a "perfect" record of never generating positive free cash flow. The company burned through $389 million last year, along with a further $679 million over just the past nine months. Analysts who follow the solar panel lessor see no hope for a GAAP profit as far out as 2016.

In short, the stock embodies the very concept of "speculation." It might go up, certainly -- so long as "greater fools" can be found to buy it. But without any profit to back up its stock price, SolarCity is more likely to go down in flames.

Put a cap in itBatting cleanup in today's list of green energy strikeouts is Capstone Turbine. This morning, FBR Capital turned positive on the stock, assigning an outperform rating and asserting "that natural gas as a fuel is at an inflection point and that Capstone, with its reliable and versatile microturbine product, is well positioned in this market."

I'd argue that it's only well-positioned to lose investors money.

Perpetually unprofitable and forever burning cash, Capstone Turbine hasn't booked a profitable or free-cash-flow positive year, well, ever. (and it's been around since 1997). Granted, FBR is convinced that a surge of demand for Capstone's microturbines will turn this company into a "profitable and cash flow-positive business ... over the next 12–24 months." But to be painfully blunt -- if Capstone hasn't figured out a way to turn a profit in 17 years, I doubt that an extra year or two is going to make much of a difference.

Based on the company's track record, I'm fairly certain of what rating this stock deserves -- and outperform is not it.

Rich Smith has no position in any stocks mentioned, and doesn't always agree with his fellow Fools. Case(s) in point: The Motley Fool both recommends, and owns, SolarCity and Waste Management. 

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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