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.

Riddle me this
What do you get when you combine one of the worst stock pickers in the universe with one of the best stock picks in recent memory? Answer: Alarm bells going off in the minds of Foolish investors.

On Thurssday, stockpicker Wedbush Morgan upped its rating on solar powerhouse First Solar (NASDAQ:FSLR) from "hold" to "buy." In response, the stock rose precisely 0.01%. (And no, I didn't misplace a decimal there.) Is there some reason for the anemic response to Wedbush's upgrade?

Sure. Because, well ...
Reviewing the broker's record on CAPS, we find a couple of clues to why investors so studiously ignored Wedbush's upgrade yesterday. For one thing, this broker only calls stocks right about 45% of the time. For another, while it's rare for even good stock shops to pick winners more often than say, 50% of the time, Wedbush's performance is so bad, it ranks in the bottom quintile of investors. On average, its picks underperform the market by more than two percentage points.

Now, in fairness, let me point out that Wedbush has picked some winners in the solar power and adjacent semiconductor industries. Notably, its endorsement of SunPower has turned in nearly a double:

But Wedbush's stock-picking prowess is far from perfect:

Don't get burnt
In endorsing First Solar yesterday, Wedbush said it expects to see "continued operational excellence" from the firm. It had better, because at the price these shares fetch, anything less than excellence will send First Solar tumbling.

The problem, you see, is that even "excellent" companies can stumble if given enough time. Prior to 2006, few people predicted a slowdown at Whole Foods (NASDAQ:WFMI) -- but it happened, and the company hasn't grown its year-over-year quarterly earnings in 18 months. Or take Starbucks (NASDAQ:SBUX). Raise your hand if you honestly thought it likely that the undisputed world champion of coffee would ever lose money. Yet the unthinkable happened just Wednesday.

Despite multiple examples of the small-f folly of predicting limitless growth far into the future, Wedbush tells us that First Solar will earn $3.49 this year, $6.61 next year, and $8.64 in 2010. Is it possible? Sure. But is it sure? No.

Foolish takeaway
So here's my point. A lot can go wrong between now and 2010 -- oil prices could drop, hurting demand for solar. Or silicon prices could drop, increasing competition between old-school photovoltaics and thin film pioneers like First Solar, squeezing profit margins in the process.

So heed the old saw: Don't count your chickens before they're hatched, and don't pay 33 times 2010 earnings for First Solar until you're sure they'll materialize.