The Stock I'm Most Likely to Sell

This article is part of our Rising Star Portfolio series.

I recently highlighted five stocks I believe are particularly safe investments from the Rising Star portfolio I'm managing for Fool.com. Now, I've decided to try another exercise: which stock am I most likely to sell? First Solar's (Nasdaq: FSLR  ) really been trying my patience recently.

When good only goes so far
Granted, there are a few weak silver linings surrounding First Solar's clouds, even as the stock has dropped about 65% since my September purchase. For example, although the solar industry overall is beset with challenges, First Solar has clout as an industry leader. The stock looks cheap, too; it trades at just eight times forward earnings, and has a PEG ratio of just 0.35.

First Solar has also garnered some impressive deals. For example, it sold its Topaz solar farm to MidAmerican Energy, a unit of Berkshire Hathaway (NYSE: BRK-B  ) , adding the missing component of sun power to MidAmerican's existing portfolio of traditional power plants and wind farms.

Granted, deals like this one back up the theory that solar power is increasingly ready for prime time -- and more likely to find private-sector support, although tax incentives are also arguably generating more private-sector interest in solar power these days.

Just as dirty as Big Oil?
On the other hand, troubling issues have cast shadows over my original enthusiasm for First Solar shares.

In October, First Solar ditched then-CEO Rob Gillette with little disclosure as to exactly why, although there's good reason to have looked askance at his tenure. In his first 15 months on the job, he raked in more than $30 million in compensation as the stock dropped 60%, and he may be eligible for $8.9 million in severance.

For some added perspective, Gillette's compensation was 19% higher than that of Chevron's (NYSE: CVX  ) chief executive officer at that time, while Chevron share price had increased by 54%.

Frankly, I've become worried about how First Solar's board devises executive compensation. Gillette even received a $5 million signing bonus to convince him to come aboard from his previous post at Honeywell.

Since then, under founder and interim CEO Mike Ahearn, First Solar has let loose a stream of challenging news. It's reorganizing (and letting go 100 workers) as it switches focus from small rooftop solar installations to mammoth solar farms.

Bloomberg recently reported that First Solar has somehow managed to outspend BP (NYSE: BP  ) in lobbying politicians for aid. Since 2007, the company has spent $2.2 million on Washington lobbying, and it gave $150,000 to California political campaigns last year, far more than BP's North American unit shelled out in that state ($38,750).

In other words, some companies formulating alternatives to Big Oil may be actually following in its crude footsteps. According to the Center for Responsive Politics, the oil and gas industry ranked third in lobbying expenditures in 2011, shelling out about $110.7 million.

First Solar's lobbying and campaign contribution expenditures are a drop in the proverbial bucket compared to the oil and gas set, which includes behemoths like ExxonMobil (NYSE: XOM  ) , Chevron, and Occidental Petroleum (NYSE: OXY  ) . You can check out a breakdown of such gigantic oil and gas companies' campaign contributions in 2011, as well as their massive lobbying expenditures. First Solar may be learning fast about spending money to gain political favor, though; the Center for Responsive Politics reports that its total lobbying expenditures in 2011 added up to $480,000 -- incidentally, nearly as much as failed solar outfit Solyndra.

Solar power is a clean, green, renewable energy source, but that doesn't mean the industry couldn't get dirty in other ways. One of the themes of 2011 has been the need to separate money and politics, and right now, it doesn't look like First Solar's showing a socially responsible or passionate path to profits. Instead, it simply sounds like it's got a case of Big Oil envy.

Save it or sell it?
On a strictly financial level, First Solar recently slashed its 2012 guidance; it now expects earnings of $5.75-$6.00 per share compared to the previous estimate of $6.50-$7.50 per-share profit. The company has lowered its sales guidance to $2.8 billion-$2.9 billion from October's expectations of $3 billion-$3.3 billion.

I can take lowered guidance in stride, as the fact that Chinese competition is making times tough for the U.S. solar industry is pretty common knowledge.

However, I can't take the other damning evidence lightly. Pared-down financial expectations seem more insulting when you realize money has been thrown around in ways shareholders shouldn't applaud, like huge signing bonuses, pay for failure, and political purposes. Nobody can blame China for that.

Since the Rising Stars project's inception, I've vowed to set up a long-term portfolio, so selling a stock after only a few months doesn't come naturally to me. I'm also aware of the pitfalls of selling when investors feel most negative about a company's future. Buying high and selling low stinks.

However, given recent events, I am beginning to wonder if First Solar's story is fundamentally changing. My Foolish colleague Travis Hoium recently outlined several ways to save this solar stock. At some point, though, it might be time to admit to a mistake and head for stocks with sunnier prognoses and far fewer unattractive attributes. I wanted to design this portfolio as one to feel good about, after all.

Do you think I should sell, hold, or buy more? Add your thoughts about First Solar in the comments below, or add First Solar to your Watchlist to track the ongoing developments.

Alyce Lomax does not own shares of any of the companies mentioned in her personal portfolio. The Motley Fool owns shares of Berkshire Hathaway and First Solar. Motley Fool newsletter services have recommended buying shares of First Solar, Berkshire Hathaway, and Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (7)

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 Report this Comment icon found on every comment.

  • Report this Comment On December 29, 2011, at 4:59 PM, mathmole wrote:

    Chinese solar manufacturers will continue to gain market share in the basic cells and panels due to the obvious cost advantages that they enjoy. FSLR may find a niche as a designer of large systems and as a buyer of panels. Politically, the salad days are most likely over for the industry as a whole. Even the utility size solar plants are not competitive, cost wise, with electricity generated at 4 to 5 times the cost of natural gas fired plants. Additionally, the power from solar is too unreliable for utilities to use without some kind of storage available to pick up the load whenever a cloud passes over. Sayonara.

  • Report this Comment On December 29, 2011, at 6:14 PM, itskash wrote:

    When I made my first buy in 2009 at 115 it went right up. I bragged a bit to my girlfriends dad and his response was, "that's a trader's stock." I kind of knew what that meant but it seemed like a sector I wanted to buy and hold. Plus I had some cushion from the immediate gain. You know the rest. Of course I doubled down this month, the day before it fell another 30%. My principal is worth next to nothing so its not even like I could substantially add to some of my more quality holdings like Intel or Conoco Phillips.

    First Solar is down huge and it could get worse. But, unlike the two good stocks I mentioned above, FSLR has the potential (in my mind) to double or triple over the next 1-3 years. It has to if the rest of the fools and I will recapture any losses on buys made between February 2007 and today.

    Maybe its naive to think it may bounce back but shortly after this investment turned red I realized that I needed to classify this as a speculative investment. The more I learned about the stock I realized there were issues of intense competition, unsustainable government subsidies and even currency issues that inevitably weigh on future earnings and stock appreciation. What's more, in a "risk-off" market, what investor with any instinct to preserve capital wants to own this stock?

    My best guess is its an investor that recognizes First Solar as the best of breed (whatever that's worth) solar manufacturer with scale and that impressive valuation based on the PEG ratio. It could also be the investor waiting for General Electric to swoop in and buy the shares for $100+ (are you listening GE??) There could also be the investor waiting for general market sentiment to change and the shorts to begin to cover (35% of float), thus magnifying the gains. Of course it could just be the investor that isn't compelled to ever realize a loss [or worse, a gain..]

    In my case, I'd prefer to just write this one off in my head, hope for the best and continue to add quality stocks to my portfolio (instead of a speculative [trader's] stock like FSLR.) Anyone that's held this stock all year is asking the same question you are. Its tough to answer so why bother? The stock was down 50% in the first 3 quarters of 2011 and we didn't sell, then it fell another 50% in Q4, and the damage was done. I think our best bet is to try to stay liquid for long enough for things to turn around. Fortunately for me (or unfortunately) I have a high tolerance for risk, a long time-frame, a steady paycheck and lots of bets on the table.

  • Report this Comment On December 30, 2011, at 3:28 AM, jdgpe wrote:

    I like the stock but my time horizon is 2015. It wont go under, but it may go lower. Sure it may get bought out but I hope it doesn't, I want to watch it run back to its previous highs. Of course that will take patients. I'm a speculative buyer if it dips under thirty. I prefer my other speculative stocks though, mhr, ACUR, and my fav DEJ.

  • Report this Comment On December 30, 2011, at 3:32 AM, aacole wrote:

    Just from reading this story, and not knowing anything else about the company, my question to you is ... bad as they are, are they still going to be in business in a couple of years? If so, is the current market cap super cheap relative to what their true value would be if investors hadn't just dumped them like a ton of bricks? If they are super cheap, hold your nose and buy shares or calls and try to make your money back. When you get to (or close to) break-even then sell the position and move on.

    If the company/industry doesn't have viability in the next two years, in your estimation, then I would recommend cutting your losses and selling today.

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