Worst Stock for 2008: First Solar

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Resolve to keep your portfolio healthy: Help us pick the worst stock for 2008.

It's been hard to miss the Green Revolution, given the steady parade of supposedly eco-friendly companies tripping over themselves to go public these past few years. Standing out among that crowd, like anything but a ray of sunshine, is First Solar (Nasdaq: FSLR) -- my nominee for 2008's worst stock.

I believe we humans face a host of big environmental and energy problems, including fossil fuel depletion and replacement, the ever-escalating price of oil, climate change, energy independence, and global warming. First Solar and its competitors Suntech Power (NYSE: STP) and SunPower (Nasdaq: SPWR) offer solutions to these problems, designing and manufacturing solar power cells and modules to provide clean, renewable, affordable electricity.

It's out to save the environment, clean up the air, and generally make the world a better place -- so what's First Solar doing on a "worst of" list? Alas, First Solar is both a great business and a lousy stock.

Time to twist the knife
My interest in environmentalism long predates the current craze, so I care passionately about the type of work First Solar's doing. As a Prius-driving, compact-fluorescent-using, former environmental engineer, and all-around enviro-tech junkie, First Solar should be right up my alley. So why isn't it?

For one thing, I've heard it all before. While I hope that the shift to greener energy does take hold in society, I've seen/heard the "this time is different" arguments before. I'll posit another hypothesis: The true shift to green tech will be a longer-term megatrend, driven by economic arguments rather than social appeals. It'll take decades to happen, and its path will be strewn with the financial ruins of thousands of unfortunate companies and investors.

Exhibit A: Ballard Power Systems (Nasdaq: BLDP) spent nearly two decades fueling green dreams of fuel cell-powered vehicles that emitted nothing but water vapor. It's a nice technology, but investors who bought in at the height of the dream, ignoring more prosaic financial questions, watched billions of shareholder dollars go up in flames.

Flying too near the sun
No matter how much I appreciate companies like First Solar, and no matter how strongly I believe that we must shift to solar energy as quickly as possible -- and we're still talking decades here, folks -- we absolutely must divorce this business from its stock.

Cold financial logic tells us that First Solar, selling at near 50 times sales, and nearly 200 times EBITDA, is insanely priced. "But it's all about the growth and the opportunity!" the faithful will cry. Certainly, year-over-year revenue growth of 271% looks tantalizing -- perhaps too tantalizing. That growth comes off a very small base, and it will slow down going forward.

Quick calculations suggest that First Solar would need nearly a decade of more "modest" 50% annual growth at a 30% operating margin to justify today's stock price. In other words, making any sort of return on your investment would require even more optimistic growth assumptions. Moreover, First Solar faces key raw-material risks that could curtail growth, crimp margins, and crush share value.

Cloudy horizon
Never confuse a business with its stock, especially when that business's mission appeals to your altruistic nature. I think First Solar is just one quarter of disappointing growth away from being the worst stock for 2008.

Whether you agree that it will lag the market, or believe First Solar will outperform Wall Street, tell us what you think in Motley Fool CAPS. Based on your ratings, we'll single out the worst stock for 2008 early next week.