Throughout the last winter and spring, solar stocks fell deeper
and deeper out of favor. Investors fretted about a sharp slowdown
in government subsidies right at a time when many companies were
expanding their factories to boost output. Prices for solar panels
and other components were in freefall as inventories piled up. But
industry executives in China had a hunch that they could find ample
demand for their rising output. They were right. Demand is better
than many had expected, and this sector is now in rally mode.
In the last three months,
Jinko Solar (
), Solarfun (
), ReneSola (
Trina Solar (
have all risen by at least +40%. If you missed those moves, ample
opportunities remain for some of the other industry players.
Jinko sets the tone
Little-known Jinko Solar has single-handedly established a more
bullish tone for the entire sector. The May, 2010
was flat-lining around $10 two months ago, but has since surged
nearly +150% thanks to recent blowout
. The company turns re-processed and virgin silicon into solar
panels and can handle all phases of the manufacturing process, from
wafers to modules to panels. That
has helped the company to become a low-cost manufacturer, which is
essential in this price-competitive business.
Earlier this week, Jinko Solar reported its first-ever results as a
, and they were nothing short of spectacular.
Earnings per share (
of $1.39 were more than double the consensus forecast as sales were
nicely ahead of plan and gross margins were firmer than most had
expected. Analysts now think the company can earn close to $3.50 a
share next year, nearly $1 more than they thought just a week ago.
Shares, which recently traded hands for around $25, could approach
$30 in coming months, but most of the sharp gains have been made in
this stock as it is no longer a well-kept secret.
Where to turn?
Some Chinese solar stocks still trade at very low valuations.
JA Solar (Nasdaq: JASO)
, for example, trades for less than seven times projected 2010 and
2011 profits. This former highflyer traded above $25 back in 2008,
but can now be had for less than $6. Sales have been surging, from
$34 million in the first quarter of 2009 to $351 million in the
second quarter of 2010. But profit growth has not been as robust
and actually fell back on a sequential basis in the most recent
quarter, thanks to profit margin pressures.
However, recent additions to manufacturing capacity have led
analysts to start boosting profit forecasts, despite expectations
that pricing and profit margins will stay under pressure. It's
unlikely that shares will re-visit those 2008 heights any-time
soon, as investors are no longer willing to slap very high
multiples on these stocks as the industry matures. Yet shares could
move up to $8 or $9 if the company can meet or exceed
recently-boosted forecasts. That translates into a +30% to +50%
gain from current levels.
A contrarian play
After a series of missteps,
Canadian Solar (Nasdaq: CSIQ)
is deeply out of favor right now. Shares have fallen more than -40%
in the past six months after a string of weak profit reports and an
announcement that an SEC investigation would likely lead to a
re-statement of 2010 fourth quarter results. But later today,
investor concerns might start to see a resolution as the company
will hold a conference call after the market closes to update
Canadian Solar was once a highflyer, too: sales at this solar panel
maker had zoomed from $20 million in 2005 to $700 million by 2008.
And although sales flattened last year, recent capacity additions
should push sales north of $1 billion this year. Equally important,
the bottom-line should rebound in 2011, with
bumping back up to $1.50. Shares trade for less than eight times
that forecast. (Profits are being constrained this year while
industry demand catches up with supply -- a situation expected to
reverse in coming quarters.)
Today's conference call will be crucial to get shares moving up
again. Management has lost a great deal of credibility and they
will have to be forthright about the issues regarding the SEC
investigation. They will have to make a clear case of why profits
will rebound so sharply in 2011 -- as is currently expected. If
they can clear the decks, this solar laggard could be the next
Action to Take -->
As a note of caution, it appears that investors will need to see
considerable upside to further boost shares of any sector stock
that had already had a good run. For example, shares of
Yingli Green Energy (
, which had risen more than +20% in the past three months, barely
budged in Thursday trading, despite the announcement of
estimate-topping results earlier in the day. Instead, investors may
want to focus on the still-weak names like JA Solar and Canadian
Solar, both of which carry very low expectations.
-- David Sterman
David Sterman started his career in equity research at Smith
Barney, culminating in a position as Senior Analyst covering
European banks. David has also served as Director of Research at
Individual Investor and a Managing Editor at TheStreet.com. Read
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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