By Paul Goodwin
I’ve developed my own method for growth stock investing, which I’ve dubbed the SNaC system. It requires a stock’s Story (business proposition, potential consumers, barriers to entry, etc.) to be accompanied by strong Numbers (revenue and earnings growth, high profit margins, etc.) and a supportive Chart (price appreciation, rising volume support, etc.).
I want to discuss LDK Solar (NYSE:LDK) in that context. There’s no denying that the story on LDK Solar is strong. Solar power is clean, renewable and can be used almost everywhere. As the price of oil continues to rise, the cost difference between a kilowatt generated by a barrel of oil and one generated by a solar array continues to diminish.
The numbers are also good, with $2.5 billion in sales in the trailing 12 months and 129% growth in sales in 2010 and 202% growth in Q4 2010. Seventy-five percent of sales come from outside China, including a very important 21% in Europe, where generous subsidies in Germany, Italy and Spain boosted installations until the Eurozone economy started coughing.
LDK is a low-cost producer, with polysilicon production costs down in recent years from $58 per kilogram to around $40 per kilogram, with a target of $30 to $35 by the end of 2011. LDK is also the world’s largest wafer producer, with more than 3 gigawatts of manufacturing capacity and a target of 3.6 GW by the end of the year.
The problem for LDK begins when you look at the chart. The stock hit a double top at 15 in November 2010 and February 2011 and corrected to 10 in March. After a little rally, the stock really hit the skids in May, dropping from 12 to as low as 6 on rising volume. Bargain hunters moved in at that point, but right now the stock is stuck at 7.
Is LDK a bargain? Sure, from a valuation standpoint. Its forward P/E ratio is just 3, and it’s reasonable to assume that the global economic recovery will eventually turn the logic of the company’s value proposition into a rally in its stock price.
Still, I’m skeptical. A stock’s chart is a summary of everything that all investors know and believe about the stock’s value. But the stock is actually worth exactly what people are willing to pay for it. And until the chart shows that investors are actively bidding the price up, a movement we call momentum, the stock is just another undervalued speculation.
The bottom line is that LDK Solar is a perfect stock for your watch list. I liked it enough to have it in the portfolio of the Cabot China & Emerging Markets Report from January through March. And I expect to like it even more when its chart improves again.