World's Scariest Stock: First Solar

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There's a lot happening in the investment world nowadays sufficient to scare the pants off you: threatened banking system collapse, talk of worldwide recession, record market volatility, and the simple unknown of when and where this roller-coaster ride will end.  But fear, well-founded or not, is an emotional response to a logical problem. Emotional decision-making does not serve us well as investors.

But paradoxically, this rampant fear makes now a great time to be a value investor. However, identifying money-making opportunities calls for tangible and rational decision-making based on a company's fundamentals. Applying such tools, I find that an old friend of mine, First Solar (Nasdaq: FSLR  ) , is still filled with emotional optimism. In a normal market, I'd find that scary enough; in a market gone rogue, I think it's downright dangerous.

Your mother wears Army boots
It's been clear to me that First Solar was an emotion-driven stock ever since I called it the worst stock for 2008. I got more hate mail (questioning my background, intelligence, parentage, etc.) about that article than anything else I've ever written, suggesting that people's attachment to the stock was unsettlingly based on save-the-planet feel-good altruism rather than sober financial analysis. My questioning of its prospects meant I was an environment-defiling corporate apologist.

So ready the hate mail, because I'm calling First Solar out again for three reasons: It still ain't cheap, competing technologies have gotten much cheaper in a short period of time, and the controlling shareholders might be sniffing around the exits.

Not cheap enough
At the start of 2008, First Solar tipped the valuation scales at nearly 50 times sales and 200 times EBITDA. Today, those metrics are around 11 and 30 times, respectively. Driven there in part by the impressive rearview growth that First Solar has put up, but also by go-go investors largely abandoning the stock (it's about two-thirds off its high). The problem is that competitors like Suntech Power (NYSE: STP  ) , SunPower (Nasdaq: SPWRA  ) , and Energy Conversion Devices (Nasdaq: ENER  ) are cheaper still. According to CapitalIQ, competitors over $1 billion in market capitalization trade hands at just more than 3 times sales and 16 times EBITDA.

Moreover, now is not the time to be buying these expensive stocks when stocks of a much more entrenched and arguably preferred competing technology -- fossil fuels (in all of its emission-belching forms: oil, gas, coal) -- are getting cheaper daily. 

Perversely, and sadly for environmental wonks like me, falling prices for "traditional" energy sources removes incentive to spur growth of nontraditional energy sources like solar. Say what you will about high oil prices being murder on your gas tank and home heating bill, but it did get folks stoked (ha!, coal joke) about alternative energy. Today, a better investment bet might be found in oil maven ExxonMobil (NYSE: XOM  ) or coal purveyor Arch Coal (NYSE: ACI  ) , now that energy derived from such sources is cheaper for your average Joe.

Not your average Joes
The other concern I have with First Solar is that it's still largely a company controlled by the scions of the Wal-Mart (NYSE: WMT  ) empire. The family still owns more than 40% of the shares even though they were selling liberally over this past summer. What happens if they seek a broader monetization or resume selling into any potential rally?

The Foolish bottom line
It's a time-honored story: Broad systemic change like the green revolution always takes longer than investors believe it will. Story stocks playing to the promised change like First Solar get bid up beyond any rational support for their stock prices, insiders start their exit, and the stock heads down, destroying the capital of the well-meaning "believer." It's the price of emotional investing. Thing is, even at today's price, the scare isn't over for First Solar investors.

Whether you agree that First Solar will continue to lag the market, or believe that it's just not that spooky anymore, tell us what you think in Motley Fool CAPS.  

Wal-Mart Stores is a Motley Fool Inside Value recommendation. Suntech Power Holdings is a Motley Fool Rule Breakers selection. Try any of our Foolish newsletters today, free for 30 days.

Jim "Spike in the Eye" Gillies owns no shares of any company mentioned. The Fool has a disclosure policy.


Read/Post Comments (11) | Recommend This Article (17)

Comments from our Foolish Readers

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  • Report this Comment On October 31, 2008, at 12:49 PM, SolarGuy10 wrote:

    First Solar has made more money then you can count.

    Must be how you got the name Fool..a person with little or no judgment,common sense, wisdom and just plain stupit.

    And you can't fix stupit.

  • Report this Comment On October 31, 2008, at 1:00 PM, TMFCanuck wrote:

    "And you can't fix stupit."

    No you can't....and it's spelled "stupid".

    Thanks for reading.

  • Report this Comment On October 31, 2008, at 2:01 PM, Borisbmx wrote:

    Honestly you havent made a good bear case Seems that you are sure you are unsure or you know that you dont know. In the third quarter First solar posted net income of $100 million, more then any other solar firm or solar division.

  • Report this Comment On October 31, 2008, at 6:34 PM, XMFWhatsmyoption wrote:

    Jim

    I'm not sure why you spend so long valuing stocks. As the other two comments highlight all you need to do is check to see if the company is making lots of money and then buy! Valuation, who needs it. 30x EBITDA will seem cheap when investors get to sell FSLR to other suckers for 60x. Clearly you are very stupit. Get on the gravy train, stop focusing on risk and check your logic at the door. Buy Buy BUY there is only one direction and that is up...to investors who've realised the folly of unemotional, disciplined, value based analysis.

    You Canadian you.

  • Report this Comment On October 31, 2008, at 7:12 PM, spt128 wrote:

    I'm new at this but I did a lot of research before I bought anything. I teach environmental science and the fact is that fossil fuels are a limited resource. I'm not looking to make a quick buck, but in the long term, what's going to happen as the fossil fuels are gobbled up? The alternative energy sources will become more and more attractive. Right now we're at the ground floor and it's the perfect time to jump on the elevator that will keep going up. Buy now while it's cheap! FSLR, EMKR, LDK, CSIQ... they all look good to me in the long run! I tell my students that we are experiencing a Bill Gates moment in time. A lot of people didn't think pc's would take off. They did. Invest in alternatives /before/ they become the dominant form of energy worldwide!

  • Report this Comment On October 31, 2008, at 8:20 PM, dwhite7777 wrote:

    You seem to have a very narrow view of alternative energy in general. They are in fossils are out. How many new coal plant compared to wind solar geothermal. Who does the gov back. How about the dire warnings of global warming. Health and all the people who die from coal plants (air polution). Money doesn't always go in hand with greed and stupidity. Perhaps this altruism isn't as misplaced as you think but just plain common sense. Wind sunshine and heatfrom the earth are all free . Not everybody has stocks in coal and feels sorry for them.

  • Report this Comment On October 31, 2008, at 9:29 PM, nPuffer wrote:

    FSLR is not a company that people buy on emotions.

    I like the way that it is being managed, the product and the price. SOLAR CITY was a brilliant idea............They will RENT these cheap panels...................

    SO MUCH of our FUTURE will be with the companies that can supply the product....and it sells itself

  • Report this Comment On November 01, 2008, at 2:21 AM, 10qdetective wrote:

    Still is a BIG assumption that KVM will be able to follow-thru on promised financing! I guess it's good to keep the faith -- great to see solar projects moving forward w. oil retracing 2007 lows!

    Nice Article!

    Your thoughts?

    http://industry.bnet.com/energy/1000356/first-solar-forecast...

    My Best,

    David J Phillips – Editor, 10Q Detective

    Contributing Energy Analyst

    CBS/CNET

  • Report this Comment On November 01, 2008, at 11:27 AM, Capn10 wrote:

    While I wouldn't put FSLR down as the Scariest Stock in the World, I do agree that the stock price has run way ahead of its intrinsic value, no doubt pumped up on well founded optimism of solar's future but well ahead of potential future profits for FSLR and with little attention to the risks to First Solar in particular in this increasingly competitive space.

    This is a great company with a superb business model and great financial performance history that will no doubt lead the PV sector for the next 4 years at least. But make no mistake, they have enjoyed a lead position in niche market, i.e. fat margins. The future of solar is mass market with tightening margins and increased global competition. This will come in the form of huge plant capacities owned by large multinationals that need to fill production lines and it will come from more efficient PV and solar thermal technologies.

    Also FSLR's future is tightly coupled with the CdTe and its potential efficiency and supplies of Te. Te supplies are likely to be severly strained before the end of the next decade, limiting growth possibilities of the CdTe sector. There is no reason to believe that FSLR will hold a competitive advantage once the technology moves on to the new cost driving technology in the industry - whatever that may be. Looking out to 2010, I see it at $110 +/- $30.

    Market Cap: NPV of Future Profits ($M) $9,362

    2010 Share Value $110

    2010 Share Earnings $6.19

    PS on 2010 Revenue 4.2

    PE on 2010 Earnings 19

    Mean Nominal Discount Rate to 2030 13.5%

    Nominal Terminal Discount Rate 11.0%

    Terminal Beta 1.2

    Assumed Real Profit Growth after 2030 1.9%

    2010 Revenue $2,240

    2010 Gross Margin 53%

    2010 Profit Margin 22%

    2010 Earnings $495

    Revenue Mean Real Growth Rate to 2020 16%

    Revenue Mean Real Growth Rate to 2030 9%

    Earnings Mean Real Growth Rate to 2020 11%

    Earnings Mean Real Growth Rate to 2030 3.6%

  • Report this Comment On November 05, 2008, at 3:10 PM, tradingnewbie wrote:

    Killer commenting, Capn10. You've given us an analysis and comparison discussion on FSLR worth reading, not just someone's emotional ranting. Thanks for taking the time to be so complete!

  • Report this Comment On November 07, 2008, at 1:00 PM, Capn10 wrote:

    Thanks Tradingnewbie,

    I like to keep grounded in traceable and quantifiable assumptions with stocks like this that are wildly traded on news and mood swings without regard to valuation. I bought in at $102 and dumped it between $140 and $170. I had been waiting for over a year to buy at a price close to what I consider fair value.

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