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.
And speaking of the best ...
What do you do when one of the smartest investors in the solar industry -- an analyst that spotted First Solar
This morning, as investors returned to market, the bangs and claps of fireworks still ringing in their ears, All-Star analyst Piper Jaffray dropped a bombshell of its own: "AMAT's entry into solar has not gone well in the thin film solar market." Worse: "... recent checks have indicated that the semiconductor super cycle is intact, [but] we believe that the solar head wind will likely cause AMAT shares to underperform relative to its peers." In anticipation of this unhappy event, Piper pulled its buy rating on Applied Mat and advised investors to take a "hold" position on the stock.
But is Piper calling the right tune?
Let's go to the tape
On the one hand, a Fool would be crazy to discount Piper's advice entirely. After all, Applied Mat's work in the solar sector includes heavy investments in "thin film" technology -- the solar entree that sent First Solar shares soaring, and gave Piper street cred in this industry. If Piper's worried about "solar head winds," investors might want to start worrying, too ... but not too much.
After all, aside from the size of its win, Piper's record on First Solar bears highlighting for one additional reason: It's one of the very few solar stocks on which Piper got anything right. Consider the analyst's record elsewhere in the sector:
|
Companies |
Piper Said |
CAPS Says |
Piper's Picks Lagging S&P by |
|---|---|---|---|
|
ReneSola
|
Outperform |
**** |
28 points |
|
Yingli Green Energy |
Outperform |
**** |
45 points |
|
SunPower |
Outperform |
*** |
51 points |
Consider too that Piper's argument for tossing this stock on the scrap heap flies in the face of an apparently attractive valuation on the stock today. While it's true that losses in the firm's solar business have Applied's profits on the mat right now, and tossed its P/E ratio up to nosebleed levels, back where the rubber meets the road, Applied Mat is still generating lots of cash from its business. With $1.1 billion in free cash flow generated over the last 12 months (months that, I think you'll agree, have not been kind to the solar industry), Applied Mat currently sells for the low, low price of just 14.5 times free cash flow.
Apply a zippy 13.3% growth rate to this valuation, tack on $2.1 billion in net cash on the balance sheet, and a generous 2.3% dividend yield for good measure, and about the worst thing I can say about Applied Mat today is that its undervaluation isn't super-deep just yet. The stock definitely does look undervalued to me -- call it 10% to 20% upside, as a very rough guess.
Foolish takeaway
That said, there's no reason in the world you need to follow my advice and ignore that of Piper. While you might be sacrificing some profits by exiting the stock today, no one's going to blame you if you choose to take a wait-and-see stance on the stock, and see if the analyst's worries prove correct. To the contrary, in a market like this one, discretion may indeed be the better part of profitability.
If that's the tack you choose to take, then Piper has a couple other ideas for you. If you want to own a piece of the reviving semiconductor sector, but would rather stay out of the hot, noonday solar market, consider putting new money to work in Intel
