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.

Last one out, turn off the lights
Investment megabanker JP Morgan issued a spate of downgrades in the solar sector yesterday, dropping Evergreen Solar (Nasdaq: ESLR) down from "overweight" to "neutral," and assigning the equivalent of a "sell" rating to each of First Solar (Nasdaq: FSLR) and Energy Conversion Devices (Nasdaq: ENER).

Warns JP: "This industry faces a number of supply and margin headwinds." The supply chain today looks "eerily similar to what happened to the industry in C2H08-C1H09 when the market was oversupplied by as much as 30% for several quarters." All of which bodes ill for solar prices, threatening to squeeze margins up and down the supply chain.

And how did investors react to JP's dire prediction? Energy Conversion is down a bit from its pre-downgrade, Monday price. Evergreen's sitting right where it was before JP whacked it, and First Solar is ... up 1%. Why?

JP Morgan: Master of bad timing
I can sum up the reason for this banker's bad fortune in three letters: P, G and ... E. No sooner had JP downgraded its solar trio, you see, than out came First Solar with an announcement that PG&E (NYSE: PCG) had signed it to a 550 megawatt-capacity solar project in Riverside County, Calif.

The project, dubbed "Desert Sunlight," aims to receive fast-track approval from the California Public Utilities Commission, then to begin construction in by year-end 2010. The prospect of such large-scale demand for First Solar's thin-film solar product, so soon, is doing wonders for the stock -- reversing yesterday's post-downgrade dip, and driving First Solar even higher today.

Doh!
I know. People have been warning that First Solar -- most solar stocks, in fact -- was overvalued for months. It's just plain bad luck that by the time JP finally got its head wrapped around the oversupply problem, and decided to hop aboard the downgrade train and pan these stocks, that would be the day that First Solar would announce a new contract and inspire investors to hope for a rebound in the stock. But it's not the first time JP has mistimed a rating:

JP advised investors to buy rival banker Citigroup just before the financial system imploded in '07, told its clients to "bet on black" at the now deeply in-the-red Las Vegas Sands in '06, and suggested Suncor and its oil sands would do boffo business in '08 -- right before the oil market did its swan dive.

You would've been right ... but you're wrong now
It's an up and down record that JP sports -- but those are the types of results you should expect from mistiming your attempt to jump aboard a moving train. With the stock down 12% from its 52-week high, clearly there was a point in time when First Solar was overvalued ...

But that time is not now. After reporting strong earnings last quarter, we now find First Solar standing almost alone among solar companies in reporting positive free cash flow from its business (not as much as it reports as "profit" under GAAP standards, but still positive). Fiscal 2009 free cash flow came in at $395 million and change, last year, which when applied to the stock's $9.4 billion market cap gives us a price-to-free cash flow ratio of less than 24.

Foolish takeaway
There's no dearth of overvalued, cash-burning businesses in the solar sector today. If you want to take a short position on this industry ... well, take your pick. Targets abound. However, if (and I admit, it's a big "if") First Solar can live up to Wall Street's predicted 27% long-term earnings growth rate, I believe the stock has finally become fairly priced -- and may even be cheap.

Sorry, JP. You would have been right once, but now you're just late. And wrong.