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 best ...
Is it time to buy Yingli Green Energy (NYSE: YGE)? Depends on whom you ask. According to the solar specialists at Janney Montgomery Scott, there's no better play on the coming Solar Revolution than Yingli, which Janney calls "a major price setter" in the photovoltaic market.
Janney observes that Yingli is "currently shipping more than its current nameplate capacity." In conjunction with "other evidence that prices are beginning to stabilize," Janney predicts that "[a] combination of strong demand, better credit, and stable supply" will yield robust sales for Yingli, improved margins, and ... an upgrade from neutral to "buy."
Not so fast
HSBC, however, begs to differ. In a series of solar ratings issued this morning, HSBC places Yingli at the bottom of the solar stack. Rather, HSBC thinks Trina Solar (NYSE: TSL) you're your best play in the solar space. Suntech Power (NYSE: STP) got an upgrade to "neutral" on the back of last week's announcement of a major Chinese push into rooftop solar panels. But Yingli? Not only did HSBC downgrade the stock; it dropped it two full slots -- all the way from "overweight" (buy) to "underweight" (sell).
Buoyed by news of the positive Trina initiation and Suntech upgrade, investors have bid both stocks up strongly. But here's the really interesting bit: Investors are also buying Yingli, disregarding HSBC's bearish rumblings, and latching onto Janney's happy-talk instead. Is that the right call?
Let's go to the tape
To get a few clues to the analysts' relative skill in picking solar stocks, we turn to Motley Fool CAPS, where we're been tracking each stock shop's performance for more than three years now. What we find in the public record, however, is far from encouraging:
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Stock
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Janney Says:
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CAPS says:
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Janney's Picks Lagging S&P By:
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SunPower (Nasdaq: SPWRA)
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Outperform
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***
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15 points
|
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First Solar (Nasdaq: FSLR)
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Outperform
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**
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27 points
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FuelCell Energy (Nasdaq: FCEL)
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Outperform
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**
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41 points
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Investors seem very optimistic now that Janney's turned positive on Yingli Green Energy. Yet, literally every time Janney has picked a solar stock to outperform in the past, the stock has done the opposite. Now for HSBC's record:
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Stock
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HSBC Says:
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CAPS says:
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HSBC's Picks Beating (Lagging) S&P By:
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Yingli
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Outperform
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****
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10 points
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Applied Materials (Nasdaq: AMAT)
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Outperform
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****
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(8 points)
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Suntech Power
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Outperform
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****
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(57 points)
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So the picture's not much better here. HSBC's 1-for-3 in the solar space, getting its picks wrong twice as often as right. Yet regarding the stock in question today, it's undeniable that HSBC was right about Yingli last time it picked it to outperform. It's also worth pointing out that across the broader spectrum of stocks these investing houses track, Janney is scoring less than 50% for accuracy, while HSBC gets more than 52% of its recommendations right -- and ranks in the top 10% of investors we track.
Blinded by the obvious ...
Of course, HSBC's record isn't the only reason my vote goes to the bears today. The fact is, I'm pretty pessimistic on most of these stocks -- the one Janney upgraded, but also the ones HSBC likes. My reason basically boils down to this: Cash burn.
You see, Janney thinks Yingli will earn $1.12 next year, $1.39 in 2011, and so is selling for about 10 times what it will earn two years out. Cheap, right? Well, maybe, if those reported profits were worth the paper they're printed on. But in fact, Janney still expects Yingli to lose money this year, and generally speaking, this whole industry has a pretty miserable record of producing free cash flow.
... and burnt by the sun
None of these companies -- Yingli, Suntech, or Trina -- is in the habit of producing cash flow statements with its quarterly earnings releases, so it's hard to say exactly where the industry is at this year. What is clear, though, is that over the last five years, Yingli has succeeded in burning through nearly $700 million in cash. Trina has burned almost $500 million, and Suntech, more than $800 million.
Lacking substantial cash flow, these companies have been forced to "rely on the kindness of strangers" to fund their operations. Yingli, Trina, and Suntech have each tapped the equity markets for more capital in recent months.
Foolish takeaway
Cash burn and incessant rounds of dilutive share issuances illustrate that the solar industry still has trouble standing on its own. My advice: Be wary of 'em all and put your money in Exxon, a company with a history of profitability and free cash flow. Maybe solar will turn profitable in the future, maybe not -- but oil is earning profits today.
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