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 track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.
Solar on fire ... or up in flames?
Do you own solar power stocks? If so, then you're going to want to pay close attention to today's news. Up on Wall Street, two big names in investment banking are slugging it out over the future of solar power in general, and SunPower
First up, Merriman Curhan Ford, which pulled a complete 180 this morning and reversed its bearish position on SunPower. According to Merriman:
SunPower is a leading vertically integrated solar cell and module maker with the highest efficiency commercially available solar panels. Solar is rapidly becoming a critical alternative energy solution with SunPower quickly becoming one of the dominant players in the solar market. We believe investors need to own [SunPower] as a core holding in an investment portfolio.
Merriman then proceeded to argue that SunPower will earn $1.90 per share in fiscal 2010, that it deserves a P/E of somewhere from 20 to 25, and therefore tagged the stock with a "$38-48 price range."
Great news, you say? Time to buy some SunPower? Well, before you do that, let's take a minute to consider Jefferies's counterargument.. Jefferies believes that "liberal Chinese lending practices" will lead to overproduction of solar panels and components in China. And, as any Econ 101 student can tell you, oversupply in tandem with level or declining demand will inevitably lead to falling prices.
Consequently, Jefferies downgraded SunPower from "buy" to "hold." But it did not stop there. First Solar
Let's go to the tape
Who's right in this battle of the Wall Street stars? It's hard to say. Right off the bat, Motley Fool CAPS can tell you that Jefferies has a far superior track record than Merriman. Whereas the former ranks near the top 25% of investors we track, Merriman sits well within the bottom 20%.
Regardless, Jefferies has little to brag about. Although it's not as bad a stockpicker as Merriman, Jefferies's 47% record for accuracy only beats out Merriman by about 5.5 points. Or more simply stated, both analysts are more often wrong than right. Worse still, they're both particularly bad at picking winners in the electrical equipment sector in CAPS. 60% of Merriman's recommendations have underperformed the market, while Jefferies guesses wrong three times out of four.
Sadly, this leaves investors pretty much right where we always are -- on our own picking solar stocks. But if the "experts" don't know what they're doing, what chance do we have?
Better than a coin flip
Actually, our chances may be better than you think. After all, the record shows that most analyst recommendations perform less accurately than a coin flip. If you've got a quarter handy, I'll bet you can beat their average handily.
Even better, if in addition to 25 cents, you've a pocket full of common sense, you should know enough to question SunPower regardless of Wall Street's blatherings. Because no matter how many times Wall Street tells you "the P/E is X" and the "growth rate is Y," and "therefore you should buy," SunPower's cash flow statement could be a much better metric to consider. Most solar energy companies have difficulty generating free cash flow because of the high capital expenditures required. SunPower is no different, it hasn't made one cent of free cash so far this decade. As of June, it burned through more than $130 million in cash over the past year alone. This is definitely something to keep an eye on when evaluating the company moving forward.
I would be wary of SunPower. But those are just my thoughts -- so please stroll on over to Motley Fool CAPS and rate the companies mentioned above.
First Solar and Suntech Power Holdings are Motley Fool Rule Breakers selections.
Fool contributor Rich Smith does not own shares of any company named above. (I know. Shocker.) You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 544 out of more than 135,000 members.