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Good Riddance, First Solar

By Alyce Lomax - Updated Apr 7, 2017 at 5:57PM

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Another reason selling this solar stock may still be a good idea.

This article is part of our Rising Star Portfolio series.

When I sold First Solar (Nasdaq: FSLR) from the real-money Rising Star portfolio I'm managing for in March, one reader commented, "Considering FSLR has fallen to almost nothing, I think that getting out now is like saying you'll get out of the car AFTER it has driven off the cliff." Although I could see that point, I had simply come to the conclusion there was still plenty of room for free fall after months of mounting red flags at First Solar.

Here's another shoe that's dropped for the solar company. GMI Ratings has issued an update on First Solar, tagging it with the serious "Very Aggressive" Accounting Risk rating, its highest litigation risk red flag. The organization, which provides global corporate governance and environmental, social, and governance (ESG) research, points out that First Solar's risk profile has been heating up for quite some time.

Since 2008, First Solar's accounting risk has dropped from "average" to "very aggressive." Meanwhile, in March, a lawsuit was filed accusing certain of the company's officers and directors of having "issued knowingly false and misleading statements" that have left the company's financial statements "materially false and misleading."

The specter of overly aggressive or "creative" accounting has definitely been rearing its ugly head recently, although one would have liked to have thought such problems ended with Enron. Groupon's (Nasdaq: GRPN) recent "math problems" show that investors aren't out of the woods yet when it comes to this sort of risky business.

GMI's issues with First Solar don't end there, either. They've awarded the company a lackluster average "C" grade for ESG issues, and the organization believes there's a 37% likelihood of class action against the company.

In retrospect, I regret having been distracted by the promise of solar power and the beaten-down stock price (First Solar shares sure did look cheap) and missing some red flags that surely were already there when I originally purchased the stock last September. I also regret not making the sell decision sooner.

What I don't regret is a factor I still believe in, and that is that alternative energy is going to become more important -- and more lucrative for investors -- going forward. I still have high hopes for algae biofuel play Solazyme (Nasdaq: SZYM), for example, although granted, my first purchase was arguably too early. Of course, part of my high hopes relate to the fact that Solazyme's products aren't just used for fuel; they can be used in food and beauty products, too. It's a pretty well diversified line for an early stage company.

I'll still be on the lookout for more promising alternative energy stocks. Overall, though, I'm struck by the fact that we investors need to be more careful than ever, and foster a willingness to reassess whether our original investment theses were wrong on certain stocks. I feel burned by my ugly negative return on First Solar (fueled by my own high hopes for solar), but I believe there was a point when the right thing to do was to stop being stubborn and simply get out of the sun.

If you're looking for new, rule-breaking stocks that take advantage of forward-looking technologies, be sure to check out our free report "Discover the Next Rule-Breaking Multibagger."

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.

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Stocks Mentioned

First Solar, Inc. Stock Quote
First Solar, Inc.
$101.64 (-1.89%) $-1.96
Groupon, Inc. Stock Quote
Groupon, Inc.
$19.97 (-3.34%) $0.69
TerraVia Holdings, Inc. Stock Quote
TerraVia Holdings, Inc.

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