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April 18, 2014  |  Login
First Solar: When the Story is Real
By John Rubino

One of the key pieces of advice is to "avoid the story stocks." That is, don't get sucked into an unproven technology or company just because it sounds revolutionary. In hot markets, everything sounds revolutionary and every company has unlimited potential. You'll see examples of such stocks and the dangers they pose to excitable investors in later chapters. But it's also important to understand that not all young companies with promising technologies fall into the story stock category. Some are for real, and though they come along only rarely, they're worth seeking out. The trick, of course, is distinguishing reality from hype, and the way to do this is to demand proof that (1) the technology is gaining acceptance in the marketplace, (2) real orders that produce real cash flow are in hand rather than merely promised, and (3) the company is capable of satisfying those orders profitably.

When First Solar went public in 2006, it had the look of a classic story stock: glamorous sector (solar), hot technology (exotic CdTe thin film), and the backing of some prominent investment banks (often a danger sign). It was growing but unprofitable, and as the pioneer in CdTe, it was way out on the bleeding edge. And its target market was utility-scale solar installations, where PV was not yet cost competitive. Investors wary of story stocks could easily have dismissed this one out of hand. But had they dug a little deeper, they would have discovered that even though solar power wasn't competitive with grid-delivered electricity, Germany was offering subsidies that made it viable. First Solar had signed contracts with major German utilities (rock-solid companies unlikely to renege) to supply all the solar panels it could produce. And its thin-film technology and production methods had been proven over the previous few years to produce PV at a cost per watt of $1.50-vastly lower than anything else on the market. In other words, this young company was the real deal, and as the figure below illustrates, its early investors had themselves a ten bagger.


Figure: First Solar Stock Price (FSLR)

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