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." While the pinstripe-and-wingtip crowd is entitled to its opinions, we've got some pretty sharp stock pickers down here on Main Street, too. (And we're not always impressed with how Wall Street does its job.)
Given that, perhaps we shouldn't be giving virtual ink to "news" of analyst upgrades and downgrades. And we wouldn't -- if that were all we were doing. Fortunately, in "This Just In," we don't simply tell you what the analysts said. We 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.
Lighting the way
What do you do when a company that's underperformed the S&P 500 consistently for nearly two years straight, suddenly announces it's done something right? I'll tell you what Wall Street does: They turn on a dime and upgrade the shares right quick. No sooner had SunPower
Pointing to SunPower's raised guidance, and arguing that it shows "demand visibility continues to improve," Caris announced Friday that it's upping SunPower's rating to "above average." Jefferies went one better, taking SunPower out of the penalty box on news that 130 megawatts of projects should be in place in Italy before that country's subsidy cuts kick in, and upping SunPower stock to "buy."
The good news didn't end there. Brigantine, ThinkEquity, and Cowen, all on record with buy recommendations for SunPower already, reiterated positive outlooks in response to last week's news. Credit Suisse, neutral on the stock, upped its estimates for this year's earnings. Needham, also neutral, conceded that it was nonetheless "impressed by [SunPower's] execution on the utility side of the business." If Wall Street were a sitcom, I suspect its title would be It's Always Sun-Powery in San Jose.
But is there a chance of rain in this forecast?
Let's go to the tape
While stellar stock pickers overall, and ranking in the top echelons of investors we track on CAPS, SunPower boosters don't necessarily have great track records in the solar power industry. Focusing on last week's upgraders, we find Caris lagging the market badly with previous solar picks such as ...
Caris's Picks Lagging
|MEMC Electronic||Outperform||****||42 points|
|First Solar||Outperform||**||52 points|
|Evergreen Solar||Outperform||**||56 points|
Jefferies's Picks Lagging
|Yingli Green Energy||Outperform||****||13 points|
|First Solar||Outperform||**||22 points|
|MEMC Electronic||Outperform||****||65 points|
Overall, Caris has eked out a market-lagging 46% record for accuracy in the semiconductors industry and gotten four out of five of its electrical equipment picks wrong (these being the two "home industries" to most solar power companies). Jefferies' record for accuracy is 42% in semiconductors and 31% in electrical equipment.
Cloudy forecasts, silver linings
Pretty sad, huh? Think it might be hard for any other analyst to "beat" this record of underperformance? Then allow me to introduce you to the third notable SunPower rater of last week: Auriga U.S.A., an analyst that ranks in the bottom quartile of investors we track on CAPS, and one fully as inaccurate as its pro-SunPower peers on solar.
Early in the week, pre-earnings, Auriga inveighed against SunPower's inability to generate operating cash flow in an environment of falling solar prices. The analyst warned investors to expect no improvement in cash flow at SunPower. Auriga was playing the same tune Friday, after results came out, insisting SunPower's report contained nothing that would change its mind, and insisting that "cash flow is a big issue."
But here's the thing: Auriga's wrong about that. Dead wrong. If you take a look at SunPower's latest cash flow statements, what you'll find is in fact a pretty sizable improvement in cash flow. Fact is, SunPower produced $166.6 million in operating cash flow in 2010, a 37% improvement over its 2009 number, and the best annual result it's ever posted. Net out spending on capital improvements and the company ended the year with $47.4 million in positive free cash flow as well, versus $46.5 million in cash burn the previous year.
Admittedly, even these numbers aren't as good as what SunPower reported under GAAP accounting standards. Viewed from the perspective of pure P/E, the company sells for just 10 times earnings today, but its still-stunted free cash flow generation has the stock priced at 36 times FCF. Personally, I think that price is still too high in light of projected 26% long-term earnings growth.
That said, an improvement is an improvement, and the improved quality of earnings at SunPower is undeniable. My opinion: Auriga's wrong to ignore this fact. Caris and Jefferies are right to acknowledge it.
Fool contributor Rich Smith does not own (nor is he short) shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 652 out of more than 170,000 members. The Motley Fool has a disclosure policy.
First Solar is a Motley Fool Rule Breakers selection. The Fool owns shares of SunPower.
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