Attractive Solar Plays Amid Last Week's Bloodbath In The Group

by: GuruFundPicks

The Guggenheim Solar ETF (NYSEARCA:TAN) ended down 17.6% last week, with solar stocks dragged down during the week by mounting debt problems in its leading markets in Europe and North America, pollution-related concerns in its major manufacturing base in China, the political drama around the collapse of Solyndra, general market malaise, and in general falling margins across most players in the industry.

As the solar stocks tumble, solar installations are growing rapidly in the US and worldwide, with installations in the US scheduled to pass the 1 GW mark soon, on their way to 1.8 GW this year, according to Greentech Media. We believe that after last week’s bloodbath, some solar companies are now trading at attractive prices and offer an attractive buy point for the speculative investor.

Buy Jinkosolar Holdings Co ADS (NYSE:JKS)

JKS is a Chinese manufacturer of silicon wafers, solar cells and solar modules with a global sales network spanning across Europe, North American and Asia. Its shares took a nose-dive falling 33.0% last week as reports surfaced first in China Daily last weekend and then in western newspapers and blogs that the company spearheading the clean energy movement with its solar power products, was ironically in trouble over accusations of discharging toxic waste containing fluoride into a local river.

JKS has suspended operations at its Haining plant, and has agreed to pay compensation to local villagers for crop damage and due to the death of livestock and wildlife from the incident. Meanwhile, it is cooperating with authorities in an investigation aimed at uncovering the source of the pollution and in taking remedial action.

We believe that the selling in JKS has been over-done, and shares are primed for at least a speculative rebound in the weeks ahead to the $10 range or higher. At Friday’s closing price of $6.06, JKS sells at 0.75 price-to-earnings (P/E) based on a trailing-twelve-month (TTM) basis, 1.35 P/E based on 2011 earnings and at 3.3 P/E based on 2012 earnings.

JKS has two plants in China, in Jiangxi and Zhejiang provinces, and it has sales and marketing offices in Shanghai, Munich, San Francisco and Bologna, Italy. It has a book value of over $21 per share, and trades at 0.13 times current and 0.11 times projected sales (PSR). The company has a track record of giving conservative guidance and exceeding expectations, as evidenced by its beating estimates by between $0.31 and $0.82 in the last five quarters. It generated a net margin of 16% versus 3% for the solar industry, and its return-on-equity is 46% versus 8% for the solar industry.

It seems that current prices are factoring in a worst-case scenario of complete and permanent plant closure of its Haining facility in Zhejiang province, whereas the current response by the authorities does not seem to fully support that assumption. So far, the company has been slapped with a $74,000 fine and a temporary shutdown, and 20 protesters have been arrested on charges.

It is quite probable then that the company may be back in business after a temporary closure, a small fine, and remedial action. While the civic protests are a step in the right direction for China as it grapples with its pollution issues triggered by breakneck economic growth, the market’s reaction to the stock price may be over-done, creating an attractive speculative buy at these levels.

Buy JA Solar Holdings Co. Ltd (NASDAQ:JASO)

JASO is a Chinese manufacturer of mono-crystalline and multi-crystalline solar cells for solar modules and systems. It was the strongest among top-tier solar companies amid last week’s bloodbath, falling only 6.4% during the week. However, the overall move cloaked a very volatile week in which the shares moved a cumulative 39.4% during the week (the sum of absolute value of the change in daily prices). For more explanation, please see the note below the Table at the end of this article).

We indicated our negative bias on JASO in our review on August 22nd shortly after the company reported a miss in the June quarter; the stock has since suffered a nearly 50% fall, and we believe at current prices near $2 the stock has an attractive risk/reward profile.

While the company has its share of problems in terms of tepid demand in Europe, rising competition, and an oversupply of solar cells leading to lower prices, the company expects demand to pick-up going forward and trades at an attractive 3.7 P/E based on 2012 earnings at Friday’s closing price of $2.20. Furthermore, JKS at 17% is among the most cost-efficient solar producers. Also with its steadfast focus on R&D is driving to even further reduce both its production costs and the average efficiency of its solar cells, which should help it to increase margins and gain market share going forward.

We believe that the solar market is rapidly moving towards a shake-out whereby only the strong companies will survive, and JKS is well-positioned to gain market share from weaker competitors going forward. Furthermore, the relative strength we saw last week in its shares last week amid a bloodbath in the group indicates that the stock has also found technical support near $2 and is forming a bottom. We believe that under the current fundamentals, shares are positioned to rise back to the $3.5-$4 range as the dark cloud lifts from the markets and the solar group.

Buy First Solar Inc. (NASDAQ:FSLR)

FSLR manufactures and sells solar modules using a thin-film semiconductor technology for residential and commercial markets in the US , Europe and Asia. In addition, it also designs, constructs, and sells photovoltaic solar power systems. Its shares were the highest dollar losers in the alternative energy group falling 26.3% or losing $1.95 billion in market-cap last week.

The only company-specific news was its Thursday morning press release that one of the three FSLR projects, the Topaz Solar Farm project, did not advance further in the Department of Energy (DoE) loan guarantee process, and that the company will seek alternative ways of financing the project. However, most of the fall in FSLR was in the early part of the week, and in fact on Friday, the stock strongly rebounded rising more than 15% from the lows to the market-close at $70.24.

At $70.24, FSLR trades at 6.4 P/E based on 2012 earnings, at the bottom of its historic trading range, while earnings are projected to continue rising at over 18% compounded growth from $7.85 in 2010 to $10.94 in 2012. This projected earnings growth is a rarity in the solar group right now, and is possibly due to the company’s strong market position in terms of its industry-leading proprietary thin-film-semiconductor technology, which gives it a huge cost-advantage over its silicon-based peers.

We believe that at current prices, the stock offers an attractive entry-point for long-term investors to get in at a bargain-basement price into this solar leader that we believe has been unnecessarily dragged down amid pessimism in the group and the general market. We believe FSLR shares can rebound in the short-term to at least $100, but we would buy it in stages to take advantage of any further weakness in the share price as the turmoil continues in the global markets and in the solar space.

LDK Solar Co. Ltd. (NYSE:LDK)

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 alternative energy group, falling 32% last week on no company-specific news, but most likely based on negative news from Jinkosolar; the probable mistaken argument being that if one Chinese solar manufacturer is in trouble for polluting, than why not assume that for all of them.

LDK reported a disastrous June quarter missing earnings estimates by $0.29 and reporting a $0.62 loss and $499 million in revenue for the June quarter versus $0.95 earnings and $766 million in revenue in the prior March quarter, and $1.09 in earnings and $921 million in revenue in the prior December quarter. Despite that, even at Friday’s closing price of $3.40, LDK trades at 14 times 2011 earnings and 7 times 2012 earnings, a premium compared to other players in the industry. While the entire solar group is trading at a discount and maybe a good buy here, we prefer other players with more attractive valuation and growth profiles such as those suggested in this article.

Suntech Power Holdings (NYSE:STP)

STP is a Chinese manufacturer of photo-voltaic cells and modules for worldwide distribution. Its shares fell 28.3% last week on no company-specific news, but based on a broad-based market sell-off and weakness in the solar group. The plunge appears as much triggered by negative news from JKS and a general weakness in the market and the solar group, as a continuation of the company’s slide since it reported a huge miss in the latest June quarter.

Specifically, the company reported a $0.19 loss and falling revenue versus a $0.17 profit in the prior quarter, and guided that revenues would be flat going forward for the remainder of 2011. At Friday’s closing price of $2.64, STP shares trade at a fair 6.8 P/E based on 2012 earnings, but it is projected to continue to report falling revenue and losses at least for the next two quarters.

We believe shares are primed for a short-term rebound following the steep 60% correction in the last five weeks; however, we believe that many of its Chinese peers such as those suggested in this article are more attractive buys based on current fundamentals.

Trina Solar Ltd. (NYSE:TSL)

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 20% last week on no company-specific news.

Furthermore, like in the case of STP above, the plunge appears as much triggered by negative news from JKS and a general weakness in the market and the solar group, as a continuation of the company’s slide since it reported a miss in the latest June quarter that it reported on August 23rd.

Its shares have been cut by half since that quarter report, and at Friday’s closing price of $7.69, TSL trades at an attractive 4.1 P/E based on 2012 earnings, while earnings are projected to be flat and slightly up going forward.

Renesola Ltd. ADS (NYSE:SOL) and Yingli Green Energy (NYSE:YGE)

SOL is a Chinese manufacturer of mono-crystalline and multi-crystalline wafers for solar power products; and 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.

SOL was down 20.9% and YGE was down 9.9% last week, both on no company-specific news but based on weakness in the markets and the solar group, and based on the negative news from JKS. We reviewed YGE earlier, indicating that we would buy it on a dip below $4 and stand-by that opinion. SOL at Friday’s closing price of $2.23 trades at 5.4 P/E based on 2012 earnings.


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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 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.