This Just In: Upgrades and Downgrades

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 …
A new day. A new trading week. All we need to make Monday complete is a couple of new stock ratings -- and happy day! Needham & Company just came out and obliged us, advising investors to sell stock in First Solar (Nasdaq: FSLR) and buy shares of Solarfun Power Holdings (Nasdaq: SOLF) instead.

Now, I know what you're thinking: "Needham? Aren't these the guys that told us to buy LDK Solar and MEMC Electronic all those years ago? That hasn't worked out so well." And you're right. Needham's past stock picks in the solar sector have been pretty abysmal. In addition to those two famously bad picks, Needham also told you to buy shares of…

… and even of First Solar itself! (Total loss on that pick to-date: 35 percentage points of market underperformance.) But while you might not want to take Needham's advice at face value, the analyst's record as a contrarian indicator in this space just might mean you can profit from turning Needham on its head -- sell what it's buying, and buy what it's selling.

The First shall be last… or shall it?
Take First Solar, for instance. According to Needham, there's a risk that "margins will deteriorate further in 2H10 and 2011, and we believe stocks of companies with falling margins typically under perform the market." In a remarkable feat of analytical gymnastics, the analyst also pours cold water on the theory that solar business is heating up in the U.S., while simultaneously clambering aboard the Europe-is-cutting-its-subsidies train. Arguing that growth will stall, margins fall, and the stock will become overvalued worst of all, Needham rates First Solar a sell, predicting the stock will decline to $92 within a year.

I disagree. Not with the major theses, mind you. With polysilicon prices falling endlessly into the pit, traditional solar panels are getting cheaper by the day, pressuring margins for First Solar and its thin-film solar offerings. In the midst of a debt crisis, Europe probably cannot help but cut its costly subsidies for solar. Here in the U.S., solar power has been the industry with a bright future (that never appears) for 40 years and counting. All that said, though, when I look at the numbers on First Solar, I start getting intrigued.

Consider: At 14 times earnings, and with 28% earnings growth projected for it, long-term, First Solar looks like that rare stock that both growth and value investors can agree on buying. True, the company's free cash flow comes in quite a bit below reported earnings under GAAP, but at $343 million for the past 12 months, it's orders of magnitude higher than it was just one year ago (when it was actually negative), and growing rapidly. At a current valuation of 27 times free cash flow, I think the stock's 28% projected earnings growth rate justifies at least holding First Solar, if not buying it outright.

And sometimes, the first gets to stay first
Conversely, and for similar reasons -- albeit at the risk of contradicting myself -- I actually agree with Needham's opinion of Solarfun, which the analyst calls "the leader in OEM solar module business." (Emphasis added, because Needham's use of the definite article is such a bold claim.)

Here we've got that rare solar stock that admits to losing money under GAAP accounting … but is actually piling up the dollars on its cash flow statement. Over the past 12 months, Solarfun has generated a whopping $52 million in free cash flow.

This doesn't just mean that, in contrast to so many of its peers, Solarfun is now in a position to begin retiring some of its debt without issuing shares and diluting shareholders. It also means that the stock sells for barely eight times free cash flow -- a bargain, if the company gets anywhere close to achieving the 18% long-term earnings growth that Wall Street expects of it.

Foolish takeaway
I'm feeling generous this week, and so I'm willing to meet Needham halfway. I see nothing wrong with engaging in a little harmless "Solarfun." However, the analyst's warning notwithstanding, I won't be a "First Seller."