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 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 goes up must come down, or so the old saw says, and yesterday we saw shares of thin-film solar-module producer First Solar (NASDAQ:FSLR) come down in a big way. Investment banker Friedman, Billings, Ramsey knocked its rating on the stock down from "market perform" to "underperform," and the stock shed roughly 6.5% in response.

What's got FBR so hot and bothered over First Solar? In a word: margins. FBR has a lot of experience in the energy sector -- a lot of it good:

Drawing on that experience, FBR argues that First Solar's move into utility-scale energy projects for the nation's electric industry may not turn out as profitably as many people seem to think. Referring to the cost of First Solar's products, FBR warns that installed-system prices need to decline 14% this year, and 20% next year, in order for First Solar to compete cost-effectively for utility work. In other words, First Solar can win the work, and the revenue streams that come with it -- but it may have to accept drastically lower profit margins to do so.

The flip side
Then again, perhaps cutting margins won't be fatal to First Solar. The company currently boasts a 30% operating margin -- more than twice the wattage put out by rival Chinese solar-power play and Motley Fool Rule Breakers pick Suntech Power (NYSE:STP). And if First Solar wins enough new business by cutting profit margins, it could well make up the difference, as the saying goes, "on volume."

FBR is one of the strongest analysts we track on CAPS. While it scores only a bare 51% for accuracy, the analyst ranks well within the top 15% of investors. I have to assume that FBR has considered the possibility that First Solar will "make it up on volume." Still, it wouldn't be the first time FBR miscalculated risks in the energy sector:

Foolish takeaway
But when you get right down to it, I have to side with FBR on this one.

First Solar is an admirable company, don't get me wrong. But in my view, the stock is priced way past perfection. Its 46% projected growth rate notwithstanding, what we have here is a triple-digit P/E stock that hasn't generated a penny's worth of free cash flow in its life. Given those facts, I see a whole lot more downside than upside in First Solar.