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." 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.

Who's hot and who's not in solar stocks
In what it called a purely "tactical" decision, investment banker Raymond James announced Wednesday that it has decided to upgrade solar stocks practically across the board. In one fell swoop, the analysts swapped out underperform (aka sell) ratings on each of First Solar and SunPower , Suntech Power and Trina Solar , substituting market perform ratings for each. But why?

According to the analyst, the reason for the reversal of opinion on solar stocks is simply this: "The risk/reward balance has shifted toward a more neutral stance." As StreetInsider.com explained the ratings move, Raymond James noted that all four of these stocks had fallen at least 13% below their 52-week highs. That being the case, there's less downside in the stocks, and less of a case for selling them.


I disagree -- and I'll tell you why.

Facts and conclusions
On the one hand, Raymond James is undeniably correct about a couple things. The four solar stocks in question have lost a lot of value over the past year. Three of the four -- First Solar, Suntech, and Trina -- are actually down quite a bit more than the 13% that RJ cites. And yes, having declined in price means there is less downside... in one sense.

Take First Solar for example. Over the past year, the solar thin film producer's shares have traded as high as $37. Today, they sell for just $26 a pop. And viewed one way, that's $11 worth of downside that you no longer have to worry about, because the shares have already fallen down those stairs.

Problem is, though, whether you start counting down from $37 or start counting down from $26, either way, a decline to $0 is still a 100% loss -- and if you ask me, a 100% loss is a very real risk investors are taking at all four of these companies.

Profits matter
Why do I say this? At the risk of being blunt, I say this because all of these companies are failing at the most basic task of any business: They're failing to earn a profit.

Measured according to generally accepted accounting principles, all four of the solar companies that Raymond James upgraded yesterday booked losses for the past 12 months. Two of them (Suntech and Trina) are expected to lose more money next year as well. Three (everybody but First Solar) were also burning cash, reporting negative free cash flows over the past 12 months. The fourth -- First Solar -- could turn free cash flow negative as early as the current quarter, judging from what it told us in its latest earnings release.

Foolish takeaway
Suffice it to say, this is not the kind of trend we should be looking for in our investments. After all, if a company cannot earn profits for itself, what hope does it have of earning profits for us, the investors who own it? Yet after more than a decade in business (the youngest of these firms is already a dozen years old), these firms still aren't making any profit.

The way I look at it, a company that cannot earn a profit is worthless as an "investment." It is -- quite literally -- worth $0 to me as an investor. While it may take some time for the stock to get there, that's definitely the direction in which these stocks are heading. And Raymond James, in pulling its sell ratings on these four stocks Wednesday, appears to have pulled the parachute early.

These stocks all have farther to plunge.

Investors and bystanders alike have been shocked by the drop of renewable energy stocks over the last 12 months. The stakes have never been higher for the industry: Is it done for good, or ready for a rebound? If you're looking for our recommendation on how to play major solar company First Solar, along with continuing updates and guidance on the company whenever news breaks, we've created a brand-new report that details every must-know side of this stock. To get started, just click here now.

The article This Just In: Upgrades and Downgrades originally appeared on Fool.com.

Rich Smith is short shares of First Solar. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.

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