Buy and Sell Ideas in Alternative Energy Based on Big Movers From Last Week

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 |  Includes: AONEQ, JASO, LDK, SOL, STP, TSL, YGE
by: GuruFundPicks
The ugly budget fight and the fallout from the lack of a meaningful debt reduction plan once again took a heavy toll on the markets last week. The global alternative energy ETF (NYSEARCA:GEX) plunged down 11.5% last week on the back of a 5.6% drop the prior week, and dropped an additional 8.3% on Monday. Of the approximately 100 stocks in the alternative energy group, 15 trading above $1 at closing on Friday, August 5 went down more than 15% during the week and none went up more than 15% during the week. The fall in the alternative energy index mirrored the overall weakness in the broader markets as the indices plunged 7-8% last week on the back of a 4% dive the prior week, and fell an additional 6.6% on Monday.
As an investor, it is imperative to keep a cool head, especially in such turbulent times, and keep scouting for new opportunities while keeping an eye on both the price movements and news flow. Our daily and weekly coverage analyzing the top movers for top buy and sell ideas is aimed at enabling you in that effort. You can access the rest of our daily, weekly and quarterly mover series here. This article covers our analysis of the top movers in the alternative energy group last week. Of the 15 stocks that moved more than 15% up or down last week, we analyzed them to determine if they would continue in the same direction or if they would reverse their moves going forward.
JA Solar Holdings Co. Ltd (NASDAQ:JASO) is a Chinese manufacturer of mono-crystalline and multi-crystalline solar cells for solar modules and systems. Its shares were down 15.8% during the week and were down an additional 17.1% on Monday. There has been no recent news, so much of the huge swoon over the last week is not company-specific and can be attributed to weakness in the broader market and the solar group.
Based on currently published analyst earnings estimates, JASO trades at a current PE of less than 2 on a trailing-12-month (ttm) basis, and earnings are projected to drop from $1.55 in 2010 to 89c in 2012. While there are nagging issues in the solar market with respect to oversupply of solar cells in the market and its effect on future prices and profits, the effect of the vagaries of government policies of countries worldwide on solar demand, raw material costs and stiff competition, we believe that at less than 2 P/E, JASO shares present a compelling opportunity to the not-so-risk-averse investor to nibble at it on the way down, buying in stages so as to take advantage of any further weakness in prices. Furthermore, JASO shares are approaching a firm base in the $3 range which should provide some downside support, at least in the short-term, while the upside opportunity is high, thereby yielding a favorable risk/reward ratio.
LDK Solar Co. Ltd. (NYSE:LDK) is a Cayman Islands-based Chinese manufacturer of multi-crystalline solar wafers, used to manufacture solar cells and modules. In addition, it provides wafer processing services to mono-crystalline and multi-crystalline solar cell and module manufacturers. It dropped 16.9% last week and an additional 14.8% on Monday. Like in the case of JASO, there is no company-specific news to account for the swoon over the last week. Furthermore, at Monday’s $4.77 close, JASO shares trade at 1.53 P/E on a TTM basis, and at 2.85 forward P/E based on FY 2012 earnings. While earnings are projected to drop from $2.23 in 2010 to $2.04 in 2011, and then to $1.67 in 2012, the company routinely beats analyst estimates by 10-30c every quarter, so the anticipated earnings shortfall may never materialize, or it may not be as severe as currently estimated.
We believe that LDK shares are priced attractive enough for a buy here. While it faces similar issues to those outlined above for JASO, LDK trades at an even more compelling 1.53 P/E, and it is within striking distance of its all-time low of $4.35 while earnings are at all-time highs. From our recollection, Wall Street analysts have been projecting gloom and doom for solar almost every quarter based on supply/demand and pricing issues. The global economic and country-specific policy change factors that go into affecting solar pricing and profits, however, are too dynamic and complex, and as a result the analyst projections cannot be taken with as much confidence as in the case of another industry segment such as enterprise software or semiconductors. It is reasonable then to consider a scenario where even if the analysts are right about the supply/demand going forward, the impact on pricing may not be as severe as is factored into their projections, and earnings may flatten out instead of dropping off precipitously as indicated in analyst projections. That would change the risk/reward completely for a company like LDK that currently trades at a 1.53 P/E while prices are near all-time lows.
LDK has some interesting backdrops that may provide further downside price support. For one, LDK management has announced a $110 million buy back of its stock, which is 14% based on its current market-cap. However, given that the CEO owns almost 49% of the company, the buyback represents an even greater 22% of the publicly traded shares. Second, there is ongoing talk about LDK spinning off its polysilicon division in an IPO on the Hong Kong Stock Exchange, which will help it raise upwards of $1.3 billion, almost twice its current market-cap. Third, the stock is ripe for a short squeeze on any positive news as over 32m shares or over 45% of the float has been shorted, and if LDK buys back 23 million shares, then over 60% of its float will be short. Finally, the company appears to have a strong backing from the Chinese government, which spells well in terms of access to financing, contracts, government subsidies and the like. With the stock currently in a free fall, we would buy here in stages to take advantage of any further weakness in price.
Trina Solar Ltd. (NYSE:TSL) is a vertically-integrated Chinese manufacturer of mono-crystalline ingots, wafers and cells to the assembly of high quality solar modules. It traded down 16.2% during the week, and was down an additional 10.5% on Monday. At Monday’s closing price of $13.42, TSL trades at a forward P/E ratio of just over 6, while earnings are projected to fall from $4.41 in 2010 to $2.58 in 2011 and rebound slightly to $2.73 in 2012. The company widely missed analyst estimates for the March 2011 quarter, when it reported in mid-May that revenue was $551 million and earnings were 41c versus analyst estimates of $579 million and $1.04. Furthermore, last Tuesday TSL also guided down for the June quarter, expecting shipment of 395-397 MW versus prior guidance of 430-450 MW, and it also guided down gross margin to 17.0% to 17.5% versus prior estimates in the low 20% range. We would not be buyers here, as there are much better values in the solar space.
Yingli Green Energy ADS (NYSE:YGE) is a Chinese manufacturer engaged in the design, development, marketing, manufacture, installation, and sale of photovoltaic (PV) products, including PV cells, PV modules, and integrated PV systems, as well as poly-silicon ingots, blocks, and wafers. It dropped 21.5% last week, followed by an additional 10.6% on Monday.
YGE trades at under 3 P/E on a TTM basis and at a forward 5 P/E, while earnings are projected to fall from $1.59 in 2010 to $1.03 in 2012. Recently, last Wednesday before the market-open, YGE guided June quarter PV module shipments above prior guidance to 35-37% sequential quarter-over-quarter (QoQ) growth versus previously provided guidance of more than a 30% increase; also, it reaffirmed its previously provided gross margin guidance in the low to middle twenties. This is in stark contrast to TSL and ReneSola Ltd (NYSE:SOL), which recently guided down. Furthermore, it is nearing its long-term support levels in the $4 range. We believe YGE shares are priced attractively, and we would be buyers on a dip to the $4-4.50 range.
ReneSola Ltd. ADS is a Chinese manufacturer of mono-crystalline and multi-crystalline wafers for solar power products. Its shares traded down 25.4% last week and they were down another 18.3% on Monday. SOL trades at a current P/E of 1.21 on a TTM basis, and a forward 3 P/E, while earnings are projected to swoon from $1.93 in 2010 to 95c in 2012. On July 13, SOL guided down June quarter revenues, shipments and gross margins below prior guidance. Earnings estimated for the June quarter now stand at 16c, which would be down huge year-over-year below the 42c reported in the June 2010 quarter, as well as sequentially down huge quarter-over-quarter over the 49c reported in the March 2011 quarter. We would not be buyers here as there are much better values in the solar space.
Suntech Power Holdings Ads (NYSE:STP) is a Chinese manufacturer of photo-voltaic cells and modules. Its shares were down 17.0% last week and they were down an additional 10.5% on Monday. STP trades at a current 2.40 P/E on a TTM basis and at a forward 7 P/E, while earnings are projected to fall steeply from $2.21 in 2010 to 76c in 2011 and 79c in 2012. We would look for better opportunities elsewhere in the solar space.
A123 Systems Inc. (AONE) manufactures rechargeable lithium-ion batteries and battery systems for transportation, utility and consumer markets. Its shares were down 24.6% last week and were down an additional 22.7% on Monday. Its shares are currently in a free fall in uncharted all-time lows territory while the company continues to generate huge losses in the range of $50-55 million per quarter and rising, rapidly burning through its remaining $147 million in cash as of the March 2011 quarter. Meanwhile, an interesting article by Seeking Alpha contributor John Petersen predicts a massive glut in the lithium-ion battery market, and contends that “third-tier” battery firms such as AONE will face an “existential threat.”
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Credit: Historical fundamentals including operating metrics and stock ownership information were derived using SEC filings data, I-Metrix® by Edgar Online®, Zacks Investment Research, Thomson Reuters and Briefing.com. The information and data is believed to be accurate, but no guarantees or representations are made.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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