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 track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

And speaking of the best ...
In a downgrade rich in irony, Soleil Securities (translate from the French) just told investors to dump the world's most popular solar stock. Opining that "the environment in which First Solar (NASDAQ:FSLR) massively beats expectations each (and every) quarter has come to an end," the New York-based investment banker removed its neutral rating on the stock and downgraded First Solar to an out-and-out "sell."

So what?
Why should you care? First off, consider Soleil's record to-date in the solar space. So far, Soleil has made only two solar picks. It hasn't yet weighed in on other hi-profile solar names like Suntech Power (NYSE:STP) or Solarfun Power (NASDAQ:SOLF). But it has recommended buying First Solar (last October) and selling SunPower (NASDAQ:SPWRA) (in May of this year.) Both picks are currently beating the market -- the First Solar "buy" by 38 percentage points, and the SunPower "sell" by three more.

But that's just the beginning of the Soleil story. Consider also how well this analyst has done in the Semiconductors and Semiconductor Equipment sector, from which this "solar power" technology sprang:


Soleil Says:

CAPS says:

Soleil's Picks Beating (Lagging) S&P By:

Teradyne  (NYSE:TER)



46 points

Varian Semiconductor 



33 points

Applied Materials (NASDAQ:AMAT)



<1 point




(81 points)

Now granted, Soleil is not perfect, and it's misstep on LDK Solar was a real doozy. But overall, Soleil boasts an incredible 80% record for accuracy in the semi-space -- which contributes mightily to the fact that this analyst outperforms 85% of ranked players on CAPS. Simply put, Soleil knows semiconductors -- and thus far, it knows solar, too.

The bear case against First Solar
So when Soleil tells us that:

  • "Industry capacity is now too large ... for government subsidy programs to lead to supply shortages and higher prices."
  • "Module pricing is ... under intense downward pressure for all producers due to massive industry over-capacity."
  • And that "First Solar has completed its capacity build-out and will no longer be starting up significant amounts of capacity each quarter helping to beat expectations" ....

... I suspect these are warnings worth listening to. What's more, I'd add another caution: First Solar costs too much.

Valuation matters
Priced at less than 20 times trailing earnings, and with a five-year annualized earnings growth rate pegged at 36%, you might not think First Solar fits the definition of an "overpriced stock." The more so with Wall Street saying its P/E will drop to 18 next year. But Soleil dumped cold water on that prediction this morning. Pointing to the evident pricing pressures, the analyst set an earnings target of just $5.65 per share for fiscal 2010 -- 24% below the consensus figure. If Soleil's right, therefore, First Solar's P/E will not drop at all next year. To the contrary, it will shoot up past 23.

And that's just the start of the bad news -- because all of these "P/E" ratios we've been talking about use GAAP "net earnings" as their basis. A better measure of profitability, to my mind, is the amount of actual free cash flow that First Solar is generating from its business. And the bad news here is that First Solar's free cash lags reported earnings badly.

Over the last 12 months, First Solar has "earned" more than $577 million. Its cash flow statement, however, shows that free cash is just $53 million over the last year.

Now, some investors will tell you that this situation is about to change. Soleil's own comment that "First Solar has completed its capacity build-out" suggests that we could see capital expenditures fall off markedly from this point forward, leading to a surge in free cash flow.

Foolish takeaway
I hope that's the case. I truly do. But until we see proof of this happening, the numbers in effect today dictate caution. Beware First Solar, Fools. This stock could burn you.

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.