This Just In: Upgrades and Downgrades

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 ...
Markets turned green again yesterday, and as seemed only proper, "green" solar energy plays were looking particularly photogenic. First Solar (Nasdaq: FSLR) gained nearly 4% for the day. Solarfun (Nasdaq: SOLF) was up more than 10%. And Motley Fool Rule Breakers pick Suntech (NYSE: STP) marched to a 6% gain, basking in the light of a "buy" recommendation from New York broker Jesup & Lamont.

Arguing that Suntech occupies "a leading position in the rapidly growing solar manufacturing industry," and is "the clear leader in the Chinese solar group" (emphasis added), J&L predicts Suntech will "continue to display strong top and bottom line growth." With oil now floating north of $120 a barrel, and solar energy becoming increasingly price-competitive with every additional dollar, I'm inclined to agree. But before jumping to the conclusion that "oil is expensive, ergo solar panel makers are cheap," let's first quality-check J&L's forecasting ability by running it through the CAPS wringer.

Let's go to the tape
Initial indications aren't good. While J&L's 22 picks, recorded by CAPS, show the analyst more often wrong than right, one of the winners is Suntech itself -- a stock whose rise yesterday was almost certainly due partly to J&L recommending it. It hardly seems fair to give J&L credit for making a self-fulfilling prophecy -- especially since it's so far remained "fulfilled" for all of one day.

The more so when you consider the kinds of picks J&L's been getting right...

... and compare them to the ones the analyst has been getting wrong:

On average, this analyst's picks underperform the market by about 1% apiece. That's only good enough to earn J&L a CAPS rating in the second-lowest quintile of investors. Nor is it particularly encouraging that J&L's only other recorded solar pick on CAPS (Yingli) has so far been a loser.

Moreover, I'm concerned about two comments that J&L made in endorsing Suntech: The argument that Suntech's shares deserve a premium valuation, and the analyst's praise for Suntech's decision to keep expanding its capacity. Regarding the first point, J&L's referring Suntech's princely price-to-earnings ratio of 44. Granted, most analysts expect the firm to continue growing its profits at nearly 38% per year over the next half-decade -- but still, 44 times earnings? That's a pretty penny.

Speaking of pennies, investors may also look askance at the quality of those earnings. Suntech hasn't produced a penny's worth of positive free cash flow in the last six years. With capital expenditures doubling and tripling pretty much every year -- and J&L apparently seeing no end to such investments in sight -- you have to wonder when, if ever, shareholders will begin to see cash from their investment.

Foolish takeaway
Oil is priced high and going higher, and the farther it climbs, the more solar power looks like a solution to our energy needs. Yet with its high price ratio and a nonexistent price-to-free cash flow ratio (because you can't divide something by nothing), Foolish investors have to wonder whether Suntech stock is a solution we can afford.

The hypergrowth investors at Motley Fool Rule Breakers think Rich has spent a bit too much time in the sun, and with too little sunscreen. Find out why they continue to worship Suntech when you pick up your free trial here.

Fool contributor Rich Smith does not own shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 707 out of more than 100,000 players. The Fool has a disclosure policy.