FSLR: Are Analysts Right to Hate First Solar Stock?

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First Solar, Inc. (NASDAQ:FSLR) stock plunged today, falling nearly 8% after an analyst with RBC Capital Markets, LLC downgraded shares of the solar panel manufacturer. FSLR stock is now down 15% over the last year and 55% in the last five years.

First Solar FSLR Stock priceBut before blindly selling all your First Solar stock and running for the hills, we should look at today’s downgrade in context.

A Thing or Two About Analysts

Putting FSLR aside for a brief moment, let’s consider the catalyst driving FSLR stock lower today to begin with: An analyst downgrade.

Wall Street analysts — even though their jobs are to know what the intrinsic value of a stock is — actually have a pretty miserable record for picking winners. They’re great at showing you where a stock’s just been but lousy at knowing what’s coming next.

Analysts also don’t particularly care if they’re making great “picks.” A 2013 academic study called “Inside the ‘Black Box’ of Sell-Side Financial Analysts,” found that “the profitability of your stock recommendations,” and “the accuracy and timeliness of your earnings forecasts” were the two least important factors helping to determine their compensations.

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Image courtesy of The Motley Fool

Pretty sad, right?

So, why should we trust today’s FSLR downgrade from RBC if analysts don’t even care how profitable their picks will be?

What RBC Said

Analyst Mahesh Sananeria held nothing back on Tuesday, and what he said was a little scary. The thing is, analysts tend to adopt the herd mentality, with a large number of them issuing estimates relatively close to each other.

RBC’s Sananeria didn’t do that today. At all. He said:

“We are rolling out 2016 revenue/ EPS estimates at $3.4B/$1.37 compared to Consensus $4.1B/$3.48 and company guidance of $3.8-4.5B/$3.5-5.0 provided in the 2014 Analyst Day.”

Just to sum that up in simple terms, RBC expects FSLR to earn somewhere between 27% and 39% of what First Solar itself expects to earn in 2016. In downgrading shares to “underperform” from “perform” and slapping a $34 price target on First Solar stock,  he thinks there’s about 40% downside to the FSLR stock price at market’s close on Friday.

These numbers are so wildly far away from consensus that they spooked investors and for good reason.

If RBC is right, then that would imply that either one of two things were going on: 1) FSLR management is grossly incompetent, or 2) There’s something far shadier going on (guiding for revenues and earnings you know to be unattainable is a no-no).

Other Lingering Concerns

Of course, RBC isn’t the only outfit to lower the price target on FSLR stock recently. The Needham Group, Inc. lowered its price target from $75 per share to $69 per share on May 1, though that’s quite a ways from RBC’s $34 target.

The extraordinarily high volatility in solar stocks over the last week is a bit off-putting as well. Shares of First Solar competitor Yingli Green Energy Hold. Co. Ltd. (ADR) (NYSE:YGE) cratered 45% in just two days, after YGE said that there was “substantial doubt as to [its] ability to continue.”

Then there was last week’s implosion by Hanergy Thin Film Power Group Ltd, which was up 552% in just a year before mysteriously losing 47% of its value in a single morning. Chairman Li Hejun boosted his short stake (in his own company!) just days before the collapse and also took out a $200 million loan using Hanergy stock as collateral two days before the selloff.

I don’t think for a second that anything like that is going on at FSLR, but it’s also tough to ignore the solar companies going down in flames alongside First Solar.

There may indeed be more risk than we thought in the high-tech world of solar. Until we hear more from First Solar about its guidance, I’d stay away from FSLR stock.

As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.

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