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." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.
But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we'll be tracking the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.
And speaking of the worst ...
For solar power investors, bad news has come in buckets these past few weeks. Plunging polysilicon prices. Contracting credit markets. Shrinking state subsidies. And downgrades -- oh, so many downgrades. But up on Wall Street, at least one investor has not yet abandoned all hope in this strange realm it's entered. Yesterday, beleaguered banking behemoth JPMorgan clambered way out on a limb and begged to differ with its fellow analysts, arguing that all is not yet lost in the solar space.
Despite downgrading Evergreen Solar
Let's go to the tape
Why would we care what JP thinks? Good question. Fact is, this megabanker isn't so good when it comes to picking winning stocks, getting 55% of the picks tracked by CAPS wrong and ranking in the bottom quintile among CAPS investors. In the solar-related field alone, JP's scorecard already includes a couple of sizeable losers:
|
Company |
JPMorgan Said: |
CAPS Says (out of 5): |
JPMorgan's Pick Lagging S&P 500 by: |
|---|---|---|---|
|
Applied Materials |
Outperform |
***** |
9 points |
|
MEMC Electronic |
Outperform |
**** |
38 points |
But while its record fails to impress, when you read this banker's report, the logic rings true. According to JP, there's a flight to quality underway -- with "quality" being defined as cash-generating capacity. The banker predicts a 25% drop in prices for solar components and systems in 2009, which will cause "margin compression at all levels of the solar energy food chain." The industry's due for a shakeout, and in JP's view, only those firms capable of cutting their capital expenditures, and producing free cash flow to remain solvent, are worth investing in.
In this regard, JP doesn't think either Evergreen or Ascent is up to the task -- hence, the sell ratings. In contrast, while neither Sunpower nor First Solar currently generates positive free cash flow, both do generate positive cash from operations -- leaving open the possibility that if they cut their capital budgets to the bone, they may emerge from this crisis intact.
While not strictly solar (Applied Materials sells equipment used by solar companies, while MEMC makes the starting material for solar cells), these companies do generate positive cash from operations and are actually free cash flow-positive as well. However, Motley Fool Rule Breakers fave Suntech Power
Foolish takeaway
JPMorgan's discovery of the virtue of cash warms the very cockles of my Foolish heart. Fact is, the only reason I don't own any solar stocks today is because I've yet to find a pure play in the space that has significant free cash flow to back up its attractive GAAP P/E ratio.
And in fact, I have my doubts that First Solar and Sunpower will fulfill JP's dreams. Maybe they can cut capital spending fast enough to generate the cash profits that underpin JP's investment thesis. Maybe not. If I were playing the solar sector, I'd "trust but verify" this point before committing funds.
