What happened

Shares of thin-film solar specialist First Solar (NASDAQ:FSLR) jumped more than 11% in early trading and are holding onto an 8.7% gain in 2:15 p.m. EST trading. First solar isn't alone -- lots of other solar stocks are having a good day today. But First Solar's gain is more curious than most.

Because First Solar just got downgraded.

Stock up glowing green arrow climbs on a stock screen

Image source: Getty Images.

So what

Well, maybe not "just," exactly. Technically, Morgan Stanley's downgrade of First Solar stock came out late in the trading session yesterday. But even so, some of the analyst's notes bear repeating, because they suggest reasons why First Solar's strong gains today could prove short-lived.

Some investors seem to think that as Vice President Biden's chances of winning the White House increase, the prospects for solar stocks, too, will increase (because Biden has promised to spend $1.7 trillion on renewable energy). But as Morgan Stanley explained, it really doesn't matter if Biden eventually wins or Trumps wins.

Whoever wins, warns the analyst, First Solar stock is "overvalued in all election outcomes."  

Now what

And I can't say as I disagree. At a current valuation of $8 billion -- $9.2 billion market capitalization minus cash and plus debt -- First Solar stock costs nearly 36 times trailing earnings and more than 54 times trailing free cash flow.

According to S&P Global Market Intelligence data, most analysts estimate that First Solar will grow its earnings at less than 14% annually over the next five years. But even if you think that's conservative and assume that, say, four years of a Biden Administration's green-friendly policies will help First Solar grow twice as fast as most analysts think likely, that would only raise the growth rate to 28% per year.

Relative to First Solar's 36 price-to-earnings (P/E) ratio, that still leaves the stock trading above a 1x ratio, and relative to the stock's enterprise value to free cash flow (EV/FCF), the ratio grows to nearly 2x. In the richly valued solar sector, such high valuations may be the norm these days -- but it still doesn't make them cheap.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.