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

And speaking of the best ...
Over the past year, solar investors have watched in horror as shares of industry leader First Solar (Nasdaq: FSLR) slipped 12% (against a 14% increase for the S&P), Suntech Power (NYSE: STP) lost 39%, and SunPower (Nasdaq: SPWRA) fell an astounding 44%. 

So, solar stocks are toast, right? Not according to JA Solar (Nasdaq: JASO) or the ridiculously named Solarfun (Nasdaq: SOLF), both of which are giving the market a sound thrashing. And not according to some of the brightest analysts in the solar industry -- Kaufman Bros., which this morning sounded the all clear for solar in general, and for wafer maker MEMC Electronic Materials (NYSE: WFR) in particular. According to Kaufman: "Expectations on the buy side and sell side are low" for MEMC. Yet "all three" of MEMC's several end markets, "semiconductor wafers, solar materials and SunEdison were stronger than anticipated." 

But hold up a sec -- "were stronger than anticipated?" MEMC doesn't report its Q2 results for another week. Could it be that Kaufman is jumping the gun on this one, upgrading the shares based on good news before it has actually happened? Or, does Kaufman know something we don't? 

Let's go to the tape
After all, this is no runt-o'-the-litter box analyst we're talking about here. This is Kaufman Bros. An analyst that has, over the four years we've tracked it, earned a rank well within the top 10% of investors we monitor on CAPS, outperforming better than 93% of its rivals. Kaufman has successfully managed to beat the odds and outperform the market on First Solar (twice!), and solidly thumped the S&P with its pick of GT Solar (Nasdaq: SOLR).

And yet, Kaufman has made its fair share of mistakes in this industry as well:

Most telling of all, it has been wrong -- dead wrong -- on MEMC. After Kaufman recommended that investors buy the stock back in 2008, the stock proceeded to tumble, costing investors roughly 65 points worth of market underperformance. So when Kaufman reverses itself now, tells us it's time to rebuy the stock ... well, forgive me if I pause.

According to Kaufman, "worries surrounding the Euro decline, financing for solar and anticipated declines in the solar feed in tariff rates in Germany" have driven expectations at MEMC so low right now that "any beat is likely to drive significant stock appreciation." And noting that "most solar industry players are now sold out throughout 2010 and into 2011," and that "demand for solar is now tracking to grow 60%+ globally," Kaufman says such a "beat" is likely to occur when MEMC reports earnings next Thursday.

Me, I'm not so sure.

Buy these numbers?
Not about the predicted "beat," mind you. I mean, maybe the company can beat expectations next week; maybe not. If you move away from the solar sector and review performance in other markets making use of silicon chips, well, Advanced Micro Devices and Intel certainly seem to be doing well.

And yet, lacking a silica-crystal ball, I'm forced to remain agnostic about the short-term future for MEMC. What I do know, is that the numbers MEMC has been producing so far -- the facts we know, rather than the guesses Kaufman is making -- suggest there's good reason why MEMC's stock has fallen on such hard times. After years of reporting strong earnings and generating gobs of cash, MEMC got thrown for a loop last year, reporting negative free cash flow for the first time in nearly a decade. Since then, the situation has gotten steadily worse, with MEMC admitting to more than $350 million in negative free cash flow at last report.

Foolish takeaway
Given the strong reports that shredded consensus expectations emerging from the twin computer chip titans this month, there's good reason for Kaufman to be bullish on MEMC today. If the analyst's right about solar demand turning out similarly better than expected, the analyst may even be right about the stock's undervaluation. As for me, though, I'm still waiting for MEMC to show me the cash money. Until MEMC demonstrates that it has flipped the switch on its cash machine back from "reverse" to "forward," I'll be sitting out today's rally in the stock. Whether that makes me a fool or a Fool, we'll know next week. (But do feel free to tell me why I'm wrong in the comments section below -- and check back in on Thursday to tell me that you "told me so.")