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." Today, 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.
A Green future for Europe
Ever since the Fukushima Daiichi disaster and Germany's subsequent "Grand Rethink" on using nuclear power, solar bulls have anticipated a tectonic shift in Europe. First Germany, then perhaps France, would shutter their nuke plants and transition to solar power for renewable energy instead. (Perhaps with a bit of help from General Electric (NYSE: GE ) and its natural gas generators on cloudy days.) It would be the beginning of a renaissance for Green energy in general, and for solar investors in particular.
Last week, one of the analysts best positioned -- geographically, at least -- to comment on solar power's prospects in Germany announced a series of initiations in the renewable power industry. Out of the 14 stocks that Deutsche Securities began covering last week, though, only one plays a role in solar power, and only a partial role at that. Here's a quick rundown of Deutsche's advice:
- Yingli Green Energy -- hold
- Trina Solar -- hold
- Suntech Power -- hold
- Sunpower -- hold
- ReneSola -- hold
- JinkoSolar Holding -- hold
- First Solar (Nasdaq: FSLR ) -- hold
- Itron -- hold
- Veeco Instruments -- hold
See a pattern here? Almost all of these stocks (Veeco and Itron excepted) are key solar players. Yet Deutsche doesn't seem excited about any of them. When you consider that Deutsche is one of the better-rated analysts on CAPS -- outperforming 85% of the investors we track -- that has to be troubling for solar investors.
Better than solar
So what does Deutsche like? Well, there's MEMC Electronic (NYSE: WFR ) , for one. A silicon wafer-maker that does nearly as much business with the computer semiconductor industry as it does with solar. There's also LED lighting specialist Cree (Nasdaq: CREE ) and a pair of biomass researchers called Amyris (Nasdaq: AMRS ) and KiOR (Nasdaq: KIOR ) , and a local German shop that makes meters for electric, gas, and water utilities, Elster (NYSE: ELT ) .
Might one of these five have better prospects than the solar stocks Deutsche passed over?
I think we can dispose of Deutsche's single, grudging solar-related play in short order. At 23 times earnings and 15% projected growth, MEMC already looks far overpriced. Sure, the analyst says that "any further downside likely triggers ... strategic options for the company" (analyst-speak for "somebody will buy them"). But considering that MEMC burned through more than $600 million in negative free cash flow over the past year, I'm not so sure anyone will think MEMC is worth owning.
You already know what I think about Cree. Great company, great products ... not-so-great stock price. At 25 times earnings and 22% long-term growth, Cree's already expensive from a PEG point of view. Add in the fact that the company only generated $14 million in free cash flow over the last 12 months (versus $146 million reported earnings), and Cree still isn't flipping my switch.
According to Deutsche, KiOR's a "buy" based on its "technology ... to convert low cost non-food feedstocks into oil." Deutsche sees KiOR's "first commercial facility" as capable of generating "breakeven" profits when oil sells for $90 a barrel, and natural gas at $4 per million BTUs. For now, though, we're still waiting for that factory to open ... and watching KiOR rack up losses in the meantime.
Similar story with Amyris. Already operational in its business of "developing renewable chemicals and fuels" from biomass, Amyris is currently not profitable. Long-term, however, Deutsche believes that "increased volumes" and "increasing yields" will lift Amyris to at least "EBITDA positive results." (Actual net profits, however, are still a way off.)
I prefer to invest in profitable companies -- and that's why Deutsche's recommendation of Elster appeals to me most. The company's profitable enough to give its stock a 17 P/E ratio and growing fast enough to earn it a projected 17% long-term growth rate. Free cash flow is strong than reported income, and according to Deutsche it will remain strong for some time. Meanwhile, "Elster is a market leader in the gas meter space with the top position in both the gas and water market globally."
Much as I love investing in profitable, cash-generating companies, I love investing in industry top dogs even more. Fortunately, in contrast to Deutsche's other picks, Elster meets all three of these criteria. Of all the recommendations Deutsche issued last week, this one looks to me like the one most likely to succeed.
Will Elster prove Rich right? Add it to your Watchlist and find out.