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I can only say "Wow!" when solars continue to rise spectacularly.

On Thursday, they continued the mini bull market:

It is possible that we might lose half of the gains on Friday. Still, the trend is wildly in one direction.

For solar investors, it has been a trying year. When solars go up, they rise in eye-popping fashion and when they go down, they decline in eye-popping amounts. It has been a wild ride this year.

The classical definition of a bear market is when a grouping of stocks decline by 20%. The converse might be true of a bull market. The eleven Chinese solars have risen roughly 30% on a weighted average basis from the lows of a month ago.

Can they continue this torrid pace? It just does not seem possible. But then they have fallen to depths not even the strongest bear could have predicted (at the beginning of this year) so perhaps a 50 to 80% recovery is possible.

In our last article, we examined four solar stocks that could be big time winners for 2012. Those four solars have the potential for 150 to 650% gains in 18 months. As a side note, First Solar could be in the same category as the four solars mentioned in the previous article. Although I was tempted to buy at $44, my personal opposition to the use of cadmium (highly toxic material) makes it hard to justify an investment in FSLR.

In this article we will present some sobering numbers just to keep this current mini bull market in perspective.

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. 2011 EPS Growth Over 2010 EPS Actuals

This is one of the most telling tables illustrating why our solars have plunged in value. For a growth industry, the results for 2011 compared to 2010 are simply atrocious. All eleven solars will underperform 2010 EPS numbers.

The good news is that from the price action of the past month, the major players seem to have digested 2011 and decided to focus on 2012.

2011 EPS Growth Over 2010 EPS

2010

Our 2011

Stock

EPS

EPS EST

% Difference

CSIQ

1.16

0.42

-63

CSUN

1.26

-0.93

-174

DQ

2.32

2.25

-3

HSOL

1.79

0.07

-96

JASO

1.61

0.38

-76

JKS

6.62

5.96

-10

LDK

2.23

0.02

-99

SOL

1.93

0.39

-80

STP

1.07

-0.36

-134

TSL

4.18

1.83

-56

YGE

1.37

0.88

-36

* Please note that CSIQ may be even lower as I have only adjusted Q3 and not Q4 to reflect the company's revised guidance for Q3.

2. Short Interest

Stock

Short Interest %

SOL

7.78%

YGE

10.95%

HSOL

2.58%

JKS

25.59%

TSL

22.34%

CSIQ

13.11%

STP

9.34%

LDK

22.36%

JASO

7.22%

* From http://solarpvinvestor.com/database/short-interest as of October 15th 2011

Have to say that the shorts have guts. If this becomes a real bull market, then one wonders how they will unwind the 20% plus short interest in JKS, TSL and LDK.

Although the bulls would argue, this is a bullish sign since they may have to unwind but the bears might argue that perhaps the big players know something that we do not know.

It surprises me that they continue to maintain a heavy short position in JKS. This is the one company that has continued to shine quarter after quarter.

3. Six Month Target Prices

If we apply a six times PE ratio to the 2011 EPS estimates in the first table, six of the eleven solars should actually be looking at theoretically declining stock prices.

JKS and DQ are the notable exceptions with strong fundamental support for stock price appreciation.

Six Month Price Targets Based on 2011 EPS Estimates

Our

Stock

2011 EPS

Current

Six Month

Potential

Street

Estimate

Stock Price

Target Price

% Gain

Target Price

CSIQ

0.42

3.29

2.55

-23

6.64

CSUN

-0.93

1.09

0.55

-50

0.90

DQ

2.25

3.27

13.49

312

9.50

HSOL

0.07

2.14

0.44

-80

3.30

JASO

0.38

2.38

2.28

-4

3.73

JKS

5.96

9.28

35.74

285

13.06

LDK

0.02

3.87

N/A

N/A

5.50

SOL

0.39

2.34

2.32

-1

3.14

STP

-0.36

2.84

1.42

-50

4.78

TSL

1.83

8.18

10.95

34

15.08

YGE

0.88

4.43

5.27

19

6.12

* Please refer to the Notes to the Tables for an explanation of target prices.

Summary

The past few weeks have been great for long-suffering solar investors. This article touches on a few reasons why one should continue to remain cautious with investments related to the solar industry.

Notes to the Tables

As we go further out from the current quarter estimates, the chance for greater variations from the actuals could increase greatly and the variations could be magnified by unexpected events. One example would be changes in the Euro versus the US dollar. Using the latest information, these are our best estimates to date. We will update these numbers each quarter with new information impacting our solars.

Due to the extreme module pricing volatility, our results could vary greatly with changes in the module pricing.

Estimates may or may not be based on company guidance. We approach each quarter based on many factors including guidance, company history of sandbagging, maximum quarterly production and general supply and demand environment for solar products.

Our general approach is to start from scratch and build up the estimates. We do not start from company guided gross margin numbers and revenue or shipment numbers. We may crosscheck on those metrics. This is analogous to a chef purchasing a soup stock versus making soup stock from scratch.

Our estimates do not include one-time entries such as forex gains or losses.

For stock price forecasting, we have used a modest six times PE ratio. If the EPS number shows a loss, we have simply used a target price of 50% of the current stock value. For EPS values close to zero, we may just enter N/A to any target value.

Source: Solars Continue To Rise