This Just In: Upgrades and Downgrades

By Rich Smith | More Articles
March 22, 2011 | Comments (3)

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

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." Here, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.

Power down on Power-One?
I'm on record naming Power-One (Nasdaq: PWER ) as one of the great deep-value bargains of our time. So imagine my shock (and dismay) when yesterday, one of the savviest analysts in the solar industry came out and recommended not buying, not holding, but selling the stock.

That's what happened Monday, when Axiom Capital initiated coverage of this solar inverter manufacturer. Now, because Axiom does not release its ratings for public review on Briefing.com (tsk, tsk), it's currently unrated on CAPS. But we happen to know that Axiom is home to a particularly good solar analyst poached from Hapoalim Securities, the man responsible for the best-performing pick to come out of that latter firm -- a recommendation to sell Suntech Power (NYSE: STP ) back in 2008.

Betting on a "Power" outage
As such, the new rating carries some weight. And here's what Axiom has to say about Power-One today: Sales into Italy accounted for "36.5% of PWER's 2010 ... sales." The recent shift in Italian solar subsidies, however, implies a "66%-91%" decline in solar power installations in 2011.

If true, this could wipe out as much as one-third of Power-One's revenue stream this year. And for anyone hoping that other buyers could pick up the slack, Axiom warns that "new inverter capacity coming online in 2011 will take aggregated global capacity to 51.2GW, despite 2011 inverter demand of just 13GW-20GW (a 31.2GW-38.2GW mismatch), implying a period of intensified pricing pressure."

Result: As rival inverter suppliers General Electric (NYSE: GE ) , Siemens (NYSE: SI ) , Emerson (NYSE: EMR ) , ABB (NYSE: ABB ) , and others (Axiom notes that there are now 360 companies selling into the market, versus "less than 100 just one year ago") vie for share in a shrinking market, profit margins will decline for everyone -- but hurt small, inverter-dependent Power-One much more than its more diversified rivals. Put it all together, and Axiom warns that the rest of Wall Street is significantly overoptimistic about this company's chances, and predicts that within the year, Power-One shares will lose as much as 40% of their value, diving to a target price of $5 per share.

Danger! Horror! Get Out!
And I'd agree -- but for the fact that Power-One shares have already fallen 30% from their highs of earlier this year. Seems to me, this shows investors are aware of the short-term risks at Power-One but believe long-term rewards are there, too. While I take Axiom's warnings to heart, it seems to me that the dangers here are more than baked into a stock price that now amounts to a mere 8.6 times earnings despite the fact that the company possesses more than $190 million in net cash, generated $182 million in free cash flow last year, and consequently now boasts an enterprise value equal to just four times its annual free cash flow.

Foolish takeaway
Fools, I could be totally wrong about this -- and I do not recommend that you invest real money alongside my virtual bet. But over the years, I've adhered to a system of investing that has rewarded me well -- and I don't intend to abandon it today. When a company like Power-One, which even Axiom admits is "well positioned in the solar inverter market due to its competitive cost position & differentiated product offering," is selling for a price this low, I have to wonder whether the fears are overblown.

Consider: Axiom's concerns notwithstanding, the consensus estimate on this company is still that Power-One will grow earnings 21% per year over the next half-decade. The analyst predicts that this projection will slip as Power-One's perils become apparent on the Street, but how badly must Power-One blow that estimate in order to become "expensive"? Would a slowdown to just 15% growth do the trick, or 10%? I'd argue that even if Power-One slams on the brakes and grows just 5% per year over the next five years, the stock would still be cheap at today's price. For this reason, I'm heading over to Motley Fool CAPS right now to put my reputation on the line and rate the stock an outperformer.

Do you enjoy train wrecks? Can't resist rubbernecking at roadside crashes? Add the stock to your Watchlist, and see how my bet works out.

The Steve Jobs Betrayal
You may already know that in the final year of his life, Jobs revealed a stunning betrayal — and told his biographer, "I will spend my last dying breath... and every penny of Apple's $40 billion in the bank to right this wrong." What was it that made Jobs so irate — and why could it make a few in-the-know investors some major profits over the coming months and years?

Enter your email address below to find out what made Jobs so enraged!

Fool contributor Rich Smith does not own (nor is he short) shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 521 out of more than 170,000 members. The Motley Fool has a disclosure policy.

ABB is a Motley Fool Global Gains recommendation. Emerson Electric is a Motley Fool Income Investor pick. The Fool owns shares of Power-One. Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Read/Post Comments (3) | Recommend This Article (13)

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 icon found on every comment.

Report this Comment On March 23, 2011, at 10:20 AM, floridafool3 wrote:

Well written Rich. The problem with savy analists is that they can't see beyond the tip of their nose or 3 months out, whichever is shorter. At some point maybe a few will understand that big oil won't last forever; hopefully before it's too late. I'm sure when our friend goes to dinner in the Hamptons, he doesn't order the spinach salad with extra radiation or the seafood bisque with heavy crude. Folks are getting a little tired of Wall Street constantly pooh-poohing alternative energies and the companies that introduce them. It's time for them to start upgrading to 'buys' and 'strong buys' so that these companies have the wherewithal to invest, produce and bring to market more efficient technologies instead of the incessant chicken little banter we hear from them daily.
Report this Comment On March 23, 2011, at 2:04 PM, sailrick wrote:

"The recent shift in Italian solar subsidies, however, implies a "66%-91%" decline in solar power installations in 2011"
Maybe that absurd statement is where the analyst goes wrong. It doesn't seem to agree with the latest out of Italy.
IMO, China's appetite for solar is what is being ignored by analysts. Their intentions for renewable energy will dwarf the demand of Italy and Germany. Much of the Chinese solar capacity that is now being exported will be used domestically.
To anyone looking beyond next quarter or next year earnings, it is obvious that huge markets for solar are on the horizon. - India, which has a huge population with no electric grid to speak of, is a no brainer for distributed energy from solar, bringing electricity to those who now have none. There are many other countries where this is the case.
It's not an accident that China has loaned billions to solar companies, including $7 billion to STP, $4 billion to TSL and big loans to two others, Yingli and LDK? I forget which two they were.
The U.S. market is also potentially huge. Just wait till the American public really gets that they have elected a GOP congress made up almost entirely of global warming deniers, when the world scientific community is nearly unanimously in agreement with the IPCC. My hope is that this awakening happens before the 2012 election. The whole world has the same hope for a return to sanity in the U.S. congress. When that day comes, there will be marches on Washington demanding clean energy. It's also no accident that oil companies give 80% of political donations to Republicans and for coal companies it's 90%.
As solar costs continue to decline toward grid parity, these markets will explode with demand.
Wind power is a good example of what the Chinese are doing and will do in the next decade and beyond. They already have 45 GW of wind energy(vs. U.S. 35 GW).
They are on track to have 200 GW by 2020. The nuclear accident in Japan will sway them even more toward renewable energy. Not that I think nuclear is dead, but this event definitely takes some of the wind out of it's sails, even more so in democratic nations where public perception is more of a factor than in China.
Report this Comment On March 23, 2011, at 6:40 PM, Techlog wrote:

Italy just officially cancel their 2 nuclear reactor project. Now what they will do to replace this project? With a crude barrel at over 100$? The answer is simple. I am expecting they will vote soon for additional subsidies to keep alive the plan for another 2 years

Add your comment.

Compare Brokers

Fool Disclosure

DocumentId: 1462509, ~/Articles/ArticleHandler.aspx, 5/27/2012 11:11:02 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 1 day ago Sponsored by:
	DOW	12,454.83	-74.92	-0.60%
	S&P 500	1,317.82	-2.86	-0.22%
	NASD	2,837.53	-1.85	-0.07%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes