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." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.

Powering up Capstone Turbine
And we're off! The trading week has begun, and FBR Capital is first out of the gate with a big endorsement for tiny alt-energy play Capstone Turbine (Nasdaq: CPST). This morning, FBR announced an "opportunity in shares of CPST," maker of microturbines designed to provide on-site power, heat, and cooling.

Says the analyst: "[A]s microturbines move up the technology maturity life-cycle curve," Capstone could enjoy "strong 30%+ volume growth." (That prediction was quickly confirmed by the company's announcement of the sale of four C1000 "Power Packages" to an undisclosed customer this morning.) FBR argues that when "combined with cost reduction and higher ASPs," Capstone's greater scale of production should produce "improving gross margin and positive EPS over the next six to eight quarters." But is FBR right?

Let's go to the tape
If history's any guide, it very well might be. Ranked in the top 10% of investors tracked by CAPS, FBR's proven itself an especially strong performer in the Electrical Equipment industry, where fully 78% of its active recommendations are outperforming the market, including such cutting-edge tech shops as:

 Company

FBR Rating

CAPS Rating
(out of 5)

FBR's Picks Beating S&P by

First Solar (Nasdaq: FSLR) Underperform ** 81 points
Suntech (Nasdaq: STP) Underperform **** 80 points
II-VI Outperform ***** 61 points

Of course, one thing these three companies all have in common is something Capstone currently lacks: profits. Capstone has never earned a profit from its operations. It's burned cash consistently every year it's been in business, and it shows little indication of changing that pattern any time soon. Last year, for example, Capstone reported more than $22 million in losses under GAAP, while burning through nearly $29 million in negative free cash flow. So although it's true that most analysts agree with FBR about the company's potential, and the consensus is that Capstone will grow earnings by 32.5% per year over the next five years, well, 132.5% of nothing is still nothing.

What's an investor to do if FBR is wrong about the company's turnaround?

Help wanted: white knight
According to StreetInsider.com, FBR has an answer to that objection as well, as its analysts "recognize that Capstone's revenue and earnings potential could perhaps be significantly enhanced by an acquirer with a larger global brand presence, supply chain, and stronger balance sheet, and we would not be surprised to see acquisition interest over the next several quarters."

Who might FBR be thinking of, as it mulls the buyout scenario? Capstone's products compete with a whole host of bigger, better-capitalized (dare I say profitable?) companies in the turbine space. Caterpillar (NYSE: CAT), Cummins (NYSE: CMI), and Ingersoll-Rand (NYSE: IR) -- all three are listed on Capstone's Yahoo! Finance page as worthy rivals. Of the three, Cummins seems in the best position to make an offer, as it currently has more cash on hand than debt it needs to service. But really, snapping up sub-billion-dollar-market-capped Capstone wouldn't strain the ability of any of these multibillion-dollar enterprises. For that matter, General Electric (NYSE: GE) has been particularly active in the turbine biz lately -- and it's in the midst of a major acquisition drive to boot.

Foolish takeaway
In short, FBR's bullish take on Capstone isn't entirely unreasonable. The analyst has the chops in this industry to back up its optimism. There's reason to hope.

My only advice to Capstone bulls would be to keep your bets small on this stock. In the solar space, history has taught us that when solar operators like Suntech fail to generate free cash flow on their own, their stocks become incredibly vulnerable to swings in perception. Sure, even free cash flow-positivity hasn't kept First Solar -- also FBR-endorsed -- from harm. In the event that Capstone fails to make a go of the microturbine business on its own, you can wait a long time, and lose a lot of money, hoping for a white knight to ride in and save you from a mistake.

Bet small, lose small.

Fool contributor Rich Smith does not own (nor is he short) shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 507 out of more than 170,000 members.

The Motley Fool owns shares of II-VI. Motley Fool newsletter services have recommended buying shares of First Solar and II-VI.

We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.