The alternative energy group fell hard on Thursday and Friday last week on the back of a weak market, disastrous guidance in the solar sector from LDK Solar (NYSE:LDK) and JA Solar (NASDAQ:JASO), and a DigiTimes report about rising inventory backlog in the solar market leading to falling capacity utilization in the range of 50% to 60% among China-based first-tier integrated solar firms such as Suntech Power (NYSE:STP), Yingli Green Energy (NYSE:YGE), Trina Solar (NYSE:TSL), Canadian Solar (NASDAQ:CSIQ) and JASO. As a result, the global alternative energy ETF (NYSEARCA:GEX) fell 7.5% during the week, up 2.0% during the first three days of the week and down over 9% on Thursday and Friday. This article covers our analysis of the big news and price moves in the alternative energy group last week, evaluating them for buy and sell ideas.
LDK Solar Co. Ltd.: LDK is a Cayman Islands-based Chinese manufacturer of multi-crystalline solar wafers, used to manufacture solar cells and modules. In addition, it also provides wafer processing services to mono-crystalline and multi-crystalline solar cell and module manufacturers. It was among the weakest in the group last week, falling 19.7% last week, most of it on Friday after the company issued disastrous guidance for the June quarter after the market closed on Thursday. Specifically, the company guided down revenue ($480-$500 million versus prior guidance of $710-$760 million) and gross margins (1.5%-2% versus prior guidance of 22%-26%) for the June quarter as a result of a significant drop in the market price for wafers and modules. This calculates to a loss of more than 20c in the June quarter, significantly below the 43c in earnings estimated by analysts. Furthermore, and perhaps most damagingly, they slashed fiscal year 2011 forward revenue guidance by an astounding $1 billion to $2.5-$2.7 billion from $3.5-$3.7 billion, which calculates to revenue being down year-over-year in the second half of the fiscal year.
Given the above negatives, the stock appropriately reacted by falling steeply at the end of last week. However, some of the positives we outlined in our prior article almost two weeks ago when the stock traded in the $4.70s are still relevant and should provide some support to the stock after the current sell-off dissipates, perhaps near all-time lows in the $4 range. The company is scheduled to report its June quarter this Tuesday before the market opens. Furthermore, in our review of the holdings of over 60 high alpha hedge and mutual funds (from managers such as Soros, Icahn, and Mario Gabelli), we determined that none of them held LDK in their portfolio at the end of the June quarter.
Buy Yingli Green Energy ADS: 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. Its shares fell on Friday despite a strong June quarter report, amid broad based selling in the solar group and general market weakness. Specifically, YGE reported that June quarter revenue and earnings beat estimates ($681 million and 34c versus $616 million and 28c), and it reaffirmed its PV module shipment target for 2011 at 1,700 to 1,750 MW.
At Friday’s closing price of $5.26, YGE shares trade at a forward 5 P/E, while earnings are projected to plunge to $1.08 in 2011 versus $1.59 in 2010. While the current quarter revenue and earnings beat estimates, gross margins are trending in the opposite direction, down 528 basis points quarter-over-quarter and down 620 basis points year-over-year to 22.1% in the June quarter. While YGE is likely to face the same pricing pressures as some of its peers, overall we believe that this is a better pick in the solar group as in the current quarter, it beat estimates, increased PV module shipments 36.6% quarter-over-quarter, expanded global distribution and market share, and indicated that they saw signs of demand recovery in Europe triggered by a drop in module prices. We reiterate our buy issued two weeks ago when the stock traded in the $5.30s and reaffirm that we would look to buying it on a dip to the $4 long-term support levels amidst the weakness in solar stocks and the overall market. Furthermore, in our review of the holdings of over 60 high alpha hedge funds, we determined that they are bullish on YGE, holding an out-sized 11% of the outstanding shares in their portfolios at the end of the June quarter.
Suntech Power Holdings ADS: STP is a Chinese manufacturer of photo-voltaic cells and modules for worldwide distribution. Its shares fell 18.8% last week on no company-specific news, but based on a broad-based market selloff and weakness in the solar group. The company is scheduled to report its June quarter this week on Monday after the market closes. It currently trades at a fair forward 6-7 P/E, while earnings are projected to plummet from $2.21 in 2010 to 73c in 2011. Furthermore, high alpha funds are under-invested in the company, with only one high alpha fund holding less than $1 million in STP stock at the end of the June quarter.
JA Solar Holdings Co. Ltd: JASO is a Chinese manufacturer of mono-crystalline and multi-crystalline solar cells for solar modules and systems. Its shares were down 11.1% last week, after the company reported on Thursday before the market opened that in the June quarter, it missed analyst earnings estimates (22c loss versus 6c loss), and it lowered FY 2011 production guidance (1.8 GW versus 2.2 GW). The company blamed the miss on lower than anticipated installation levels in Germany and recent policy changes in Italy. The company also indicated that demand has been improving in recent weeks, but in our view, the pressure on gross and operating margins is likely to continue until higher-cost producers are weeded out from the market. Its shares currently trade at a forward 5 P/E, while earnings are projected to plummet like in the rest of the solar group from $1.55 in 2010 to 67c in 2011. Furthermore, high alpha funds are under-invested in JASO as at the end of the June quarter, they only owned $1 million of JASO stock.
Renesola Ltd. ADS (NYSE:SOL): SOL is a Chinese manufacturer of mono-crystalline and multi-crystalline wafers for solar power products. Its shares traded down 11.0% last week on no company-specific news, but based on the broad sell-off in the markets and in the solar group in particular. SOL trades at a forward 5 P/E, while earnings are projected to plummet from $1.93 in 2010 to 60c in 2011. Furthermore, high alpha funds did not own any SOL at the end of the June quarter, having sold completely out of their $2 million position in the stock from the prior March quarter.
Capstone Turbine Corp. (NASDAQ:CPST): CPST manufactures micro-turbine generators with cogeneration, resource recovery and secure power applications. The micro-turbines provide power at the site of consumption, and can be fueled by a variety of sources, including natural gas, propane, kerosene, diesel and biodiesel. Its stock was down 15.1% last week, continuing the slide that it started the prior week after reporting a disappointing June quarter. While we are bullish on CPST in the long-term based on its product appeal and applications in a wide variety of industries, and product orders and backlog, we believe that shares are likely to remain under pressure despite strong revenue growth as long as the company continues to bleed cash. Furthermore, none of the high alpha funds owns CPST stock as of the end of the June quarter.
Rentech Inc. (NYSEMKT:RTK): RTK is engaged in the commercialization of its proprietary Rentech-SilvaGas biomass gasification process that converts multiple biomass feedstocks into synthesis gas (syngas) for the production of renewable fuels and power. There was no company-specific news last week, but the stock fell off 14.8% amid the general market sell-off and weakness in the alternative energy group. Furthermore, none of the high alpha funds owned RTK at the end of the June quarter.
A123 Systems Inc. (AONE): AONE manufactures rechargeable lithium-ion batteries and battery systems for transportation, utility and consumer markets. Its shares gave back 17.2% last week after a sharp surge on Thursday of the prior week, A
ugust 11th, when GM awarded AONE a production contract for Li-Ion batteries to be used in future GM electric vehicles to be sold in select global markets. With the stock generating huge losses to the tune of $50-$55 million per quarter, and no further details on the contract size and other specifics, it is natural for the stock to have retreated last week. It is likely that the stock will remain range-bound in the short-term until the companies reveal more detail on the contract and/or AONE gets additional contracts from other tier-1 auto manufacturers. Furthermore, please note that none of the high alpha funds owned AONE at the end of the June quarter.
(Click to enlarge)Please note that the cumulative price change referred to in the last column of the Table above is used here as a measure of volatility to determine big movers in the group. It equals the sum of the absolute value of the change in daily prices. So, for example, if a security had price moves of 2%, -3%, 4%, -6% and 1% during the five days of the week, the cumulative price change during the week would be the sum of the absolute values of the daily price changes, which in this case would be 16%.
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.
Disclaimer: Material presented here is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion. Further, these are our ‘opinions’ and we may be wrong. We may have positions in securities mentioned in this article. You should take this into consideration before acting on any advice given in this article. If this makes you uncomfortable, then do not listen to our thoughts and opinions. The contents of this article do not take into consideration your individual investment objectives so consult with your own financial adviser before making an investment decision. Investing includes certain risks including loss of principal.