I recently asked a finance professor of mine to help me test a thesis: That stocks that double in a short time will tend to go down more than they go up. Using NYSE/NASDAQ data from 2001 to 2007, and stocks priced from $5 to $50, and looking at stocks that ended a quarter 2X or more above where they started, and where they finished two years later, we found:
Out of 485 cases, 75% of the stocks were lower in two years than they were after doubling
The top 20 stocks, less than 5%, were responsible for the 5-10X increase that allowed the total portfolio to slightly outperform the market.
My resulting investment thesis from this somewhat cursory review is this: when it comes to stocks whose price doubles within a quarter (not including penny stocks), you should sell them unless you can clearly see how the stock has the potential to achieve continued explosive growth.
Sunpower (SPWR) is an interesting case in point. SPWR has doubled within a quarter (actually, within a month) a couple times since January 1. Had shareholders sold after the huge jump on January 3, which took the stock to $9.00, they would have skipped the drop the next couple days that took the stock below $8.
And, had they sold when the stock went from $11 to $22 within a quarter, they would have skipped the drop over the next few days that took the stock back below $20.
But... here we are above $25. I wrote an article back in 2009, Solar Progress Reminiscent of MCMs, where I said four things about the hyped solar space:
1. Look for real revenues;
2. Beware restatements and writedowns;
3. Don't count out the technology if growth stalls;
4. Bet on companies with low cost manufacturing.
Hardly Einsteinian, but SPWR has proven this out, and at this point I'd suggest it is proving out the wisdom of the second conclusion from my study of stocks that double: if you're invested in a stock that doubles, stay there only if the potential is huge.
I believe SPWR's potential is huge for a few reasons:
1. Its record-breaking back-contact low cost (relative to III-V materials) silicon combined with CPV yields market-leading costs;
2. Electric Vehicles are poised to take off in China as subsidies are expected to be announced soon and public concern over pollution (including studies that have shown pollution levels in China are currently causing some people to die as much as 10 years sooner) is at a fever pitch. EVs really help only when the source of electricity is clean;
3. Sunpower has a JV in China, and its deal with Apple adds a cache to what is already the lowest cost, utility-scale solar solution;
4. Utility-scale installations in high-insolence regions benefit from technology advancements. The sun is not getting more powerful, but transportation and storage technologies, including EV battery grid storage as envisioned by Chinese EV manufacturer Kandi (KNDI) and State Grid, China's largest electrical utility, are.
What does "huge" mean for share price? Well, the projected price for CPV installations is $.70/watt. China is adding approximately 500 TWh of capacity a year, and if solar increases to 20% (California targets, and the World Bank announced today it is diminishing support for coal plants), that's 100TWh/year. Divided by 8760 hrs/year, if solar got 65%, figure SPWR JV gets 50% (as a market leader, why not)... SPWR owns 25%, that would be $259B/year added revenue, a 100-fold increase without violating any laws of physics. With potentially lower cost manufacturing and higher margins as additional payoffs of a large amount of capital investment.
Now, I am NOT saying SPWR is going to $2800. I AM saying that when you're holding a stock that has doubled (going on three times in SPWR's case), the question of whether you stay in is based on the ability of the company to execute a future massive increase in earnings to make holding it worth the extra risk. In my analysis, the answer is a definite yes, and I would not be shocked to see this stock at $100 in two years, and it could still have significant upward potential from there.
Speaking of KNDI, this was another stock that recently doubled in a short time, followed by a retrenchment. And, in my view, is another stock that has significant potential, and would fall in my 5% keeper portfolio.
I expect the road for both KNDI and SPWR to remain bumpy, as winning the market leading position is easier said than done, but announcements over the next few months should, in my opinion, reward shareholders for their faith and trust in these investments.