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We will diverge from our current examination of solar Q4 EPS just to look at the solar declines yesterday. I actually thought that in the surreal world of solars, stock prices would continue their descent into Dante's Inferno for another couple of months but the continuing rapid collapse in shares prices has been even more unrelenting than expected. From the highs of this year, some solars have fallen over 80%.

Our belief is that the most important catalyst for a major inflection point for solars would be a change in weekly module spot pricing from declnes to increases. However, solar prices have collapsed to the point where they are coming to a possible inflection point just by virtue of very low stock prices.

The huge destruction in solar stock prices this year are now indicating that in spite of the poor Q3 and Q4 results coming out, they may soon reverse course.

I will present two fundamental reasons supporting a change in direction. As an investor, because I tend to over-concentrate, a stock must meet two important conditions (as well as others) before I will invest. First, the short term (six month) fundamentals must be supportive of stock appreciation and second, the longer term (eighteen month) fundamentals must be supportive for stock price growth. Tthe shorter term EPS numbers relative to stock price have not been conducive for some time. So I have held a minimal position in solars for a while. Right now, we are witnessing the potential for supportive short and longer term simply because of the sharp declines in stock price.

The eleven solars discussed in this article are listed below:

  • Canadian Solar Inc. (NASDAQ:CSIQ)
  • China Sunergy Co., Ltd. (NASDAQ:CSUN)
  • Daqo New Energy Corp. (NYSE:DQ)
  • Hanwha Solarone Co., Ltd. (NASDAQ:HSOL)
  • JA Solar Holdings Co., Ltd.(NASDAQ:JASO)
  • Jinko Solar Holding Company Limited (NYSE:JKS)
  • LDK Solar Co. Inc. (NYSE:LDK)
  • Renesola LTD (NYSE:SOL)
  • Suntech Power Holdings Co., Ltd. (NYSE:STP)
  • Trina Solar Limited (NYSE:TSL)
  • Yingli Green Energy Holding Co. Ltd. (NYSE:YGE)

1. Six Month Price Targets Based on 2011 EPS Estimates

Stock

Our 2011 EPS

Current

Six Month

Potential

Street

Estimate

Stock Price

Target Price

% Gain

Target Price

CSIQ

0.02

3.20

0.14

-96

6.76

CSUN

-1.10

1.18

0.59

-50

0.90

DQ

2.40

3.10

14.43

365

9.50

HSOL

-0.05

1.87

0.94

-50

3.62

JASO

0.30

1.51

1.83

21

4.47

JKS

5.38

4.71

32.25

585

29.33

LDK

0.06

2.70

0.33

-88

5.85

SOL

0.37

1.55

2.25

45

4.56

STP

-0.47

1.70

0.85

-50

5.44

TSL

1.54

5.58

9.25

66

18.28

YGE

0.79

2.87

4.75

65

9.89

If we look at the theoretical share price gains in the short run, we are looking at potentially six companies increasing in value. Three companies could show declines simply because they could close out 2011 with a loss.

2. Eighteen Month Price Targets Based on 2012 EPS Estimates

Our 2012 EPS estimates will be published in a few weeks. A month ago, it looked like many of the companies could continue to decline in share price values. Today with the continued declines in share price, all eleven solars could be looking at healthy returns based on an 18 month time horizon.

Our 2012 estimates are based on a module ASP assumption of $1.10 per watt. Of course the solar bears (and there are many) will most likely get up in arms and claim we are looking at $1.00 per watt (or worse) for 2012. If we are looking at $1 per watt, I suggest that exiting solars right now might be a very good strategy.

So Should One Invest in Solars Right Now?

With each price decline, solars look that much better even with poor Q3 and Q4 results. Still the critical metric for all solars is the stabilization of module ASPs. That still seems weeks, maybe months away.

We don't know where the ASPs will rest for 2012. For the past three months, the ASP declines have decelerated greatly. Unfortunately they continue to decline. It is hoped that they might hit a low of $1.05 and then perhaps stabilize around $1.10 for next year.

Personally, I am hoping that solars do not change direction until the spot prices start to rise. But unfortunatel, the market gods work in strange and mysterious ways. They may not wait for ideal investing conditions.

Please note that there is one more minefield to negotiate for Q3. There may be interesting guidance revisions prior to the actual Q3 earnings release in November. As an example, LDK implied a huge increase of module sales of Q3 over Q4 - 80 MW for Q2 up to possibly 300 MW for Q3. From previous history of performance, it is possible to see a significant negative revision. Just prior to actual Q3 ER, I will post an updated set of Q3 estimates for the eleven solars.

A Footnote

This article was written yesterday. Today, there already is a strong reversal in the fortunes of solars. No one knows if this will continue. Tomorrow, the weekly spot prices come out. They will provide an indication of whether or not the reversal might continue.

Source: An Important Inflection Point For Solars