For a few years, this stock was the best investment in clean energy, according to many investors and analysts. Bar none. The company boasted intriguing technology, stunning sales growth and robust profits.

Now, by one measure, it’s the single worst clean energy investment on the stock market: The company lost investors nearly $15 billion in the past two years, in what must rank as the most stunning implosions investors have ever seen.

 
You usually see a stock chart like this when a company has committed fraud or otherwise taken steps to mislead shareholders, in effect running a house of cards that was designed to steal money from an unwary public. Yet in this company’s case, it was primarily a victim of circumstance.

I’m talking about First Solar (Nasdaq: FSLR).

A promising feature
Just a few years ago, solar power appeared to have the backing of many governments and businesses, leading the company to pump up research and development (R&D) spending and quickly expand manufacturing capacity. As we now know, that industry support proved fleeting once government budgets became constrained and traditional fuel sources like natural gas plunged in value. And First Solar, like every other industry player, is struggling to adapt to a smaller market opportunity and profound industry pricing pressures.

Most analysts — yes those same ones that only recently had $150 or even $200 price targets –now suggest you steer clear of this stock. Most have price targets in the low $20s or teens and rate the stock as “Neutral” or a “Sell.” The dislike for this company is now nearly universal.

Whenever you hear that the crowd agrees about a stock, it often helps to listen to what a contrarian voice has to say. (It would have been useful to hear from bearish analysts on this stock when it was soaring toward the $200 mark, for example.) Now that it’s in the teens, it’s time to give a close look at a recent upgrade from Merrill Lynch. In mid-April, the firm boosted its rating on First Solar to a “Buy,” with a $30 price target, which represents more than 60% upside.

Finally waking up
The ratings upgrade came right after the company belatedly announced plans to cut manufacturing capacity. Merrill correctly notes that demand for solar power equipment hasn’t disappeared. Instead, supply is the real challenge after three straight years of capacity expansion at nearly every major player. A plunge in pricing is now leading to the end of any further industry expansion plans, and in some cases, companies are cutting capacity.

Lower costs should have a tangible impact on First Solar’s income statement, according to these analysts. Their 2013 EPS (earnings per share) forecast just rose from $2.80 to $3.40. And whereas EPS was expected to slump down to $2.30 by 2014, First Solar should now earn closer to $3 by then. That forecast bakes in more tough times to come as industry pricing keeps falling. (The fact the consensus 2014 EPS forecast remains above $4.50 tells you that many analysts aren’t paying attention to their earnings models at this point.)

Merrill Lynch acknowledges that this former technology leader is becoming a technology laggard. The company’s solar equipment, using what’s known as thin-film technology, couldn’t generate as much juice as traditional solar panels, but it was so much cheaper that First Solar could offer a compellingly lower total cost of ownership.

Not anymore. Traditional solar panel makers have made so much progress on costs that they now offer a better return on investment for most customers. Merrill Lynch concedes that this issue remains a long-term concern. “We think that (traditional) crystalline solar cell prices could be in the low to mid $0.70s by mid-2013, and it’s not yet clear how FSLR intends to cope with that. Yesterday’s (cost-cutting) move might best be described as taking the pressure off for the intermediate term — fundamental problems remain.”

Yet here’s the key takeaway, as far as Merrill Lynch is concerned… Even with all of the current and future headwinds in place, First Solar remains nicely profitable. And the plunge in the stock below $20 is simply too much punishment. Merrill’s $30 price target reflects a multiple of 10 on projected 2014 earnings.

For my purposes, I need a bit more to go on than that. That’s why I’ll be listening quite closely on the conference call when First Solar releases quarterly results this Thursday, May 3.

I want to hear about the company’s technology roadmap. Management must lay out the case for the company’s ability to re-take leadership on cost per kilowatt. And they need to restore confidence that expectations have come down far enough for 2013 and beyond, and that there is now a bias for better-than-expected growth and margins in the quarters ahead, and not worse-than-expected, as many now fear. Still, Merrill’s call is grounds enough for contrarian investors to revisit this hated stock.

On a broader level, the brutal supply-and-demand dynamics that have beset the solar power industry may slowly be turning. According to Citigroup analysts, demand in a number of European countries has started to rebound in the past few weeks (leading the firm to upgrade several solar stocks, but not First Solar). And they add that demand in China and the United States represent ongoing drivers of demand, with Japan emerging as a major new source of demand in coming quarters as the country tries to wean itself off nuclear power. Improving investor sentiment toward the solar sector would surely provide a boost to First Solar’s shares as well.

Risks to Consider: First Solar has been spending heavily on R&D and will need to come up with an even more compelling technology roadmap if it is to start boosting profits into the middle of the decade.

Action to Take –> First Solar has missed EPS forecasts by at least 15% for three straight quarters. Many likely expect that to happen again this Thursday. Take this time to brush up on the business model and the numbers, because if the quarter — and outlook — are not as bad as feared, then a relief rally could ensue. That calls for quick action after the numbers are out, before analysts have time to change their target prices. That said, there’s no need to move to buy shares BEFORE the quarterly results are announced.

[Note: My colleague Andy Obermueller takes a broader look at the beaten down solar industry in his Game-Changing Stocks newsletter. To learn more about his take on this industry, including his recommendations, follow this link.]