The upcoming trading week should be very interesting for Chinese solar companies and solar companies in general, as they appear poised to continue their strong rally with many companies seeing fresh 2012 highs. Let's take a review of last Friday's trading action and see if they truly are poised to break-out this week.
SunPower (SPWR) shares rallied substantially higher on Friday after releasing earnings, posting a GAAP profit of $0.16 and smashing consensus analyst estimates that called for a $0.05 loss. The stock closed the trading session up $0.65 (8.69%) after trading as high as $9.54. Profit taking was expected as many investors have been doubling down after solar stocks took a beating the last 2 quarters of 2011.
Suntech Power (STP) shares also rallied after releasing preliminary earnings. With the shares up $0.28, (8.31%) Friday's trading session closed at $3.65. Suntech said Q4 shipments will fall 10% from a previous expectation of a 20% decline in shipments. Revenue is expected to be $610 million to $630 million, and gross margins remaining unchanged at 9% to 11%.
Suntech also said that inventories will be down significantly, which indicates that manufacturers have been able to sell off the massive inventory that piled up from Q2 and Q3 2011.
Overcapacity in the industry has been the main driver of lower prices, and now that prices are low enough to attract more installations, inventory is flying off the shelves. I remarked in my last article about ReneSola (NYSE:SOL) being a good short term swing trade, and Bloomberg ran a story about China purposely cutting polysilicon production 30% in order to get pricing back up to levels where better profit margins can be gained. This has created a temporary supply issue, giving polysilicon wafer prices a boost off their Q3 2011 lows.
If solar companies like Suntech are reporting lower inventory because supply cannot keep up with demand, companies like ReneSola should see even more benefits from this, because ReneSola actually manufactures and supplies the raw materials to companies like Suntech. It looks like-- for at least in the short term-- China's decision to cut polysilicon production is working to create a supply and demand issue. This is sure to boost pricing higher, translating into better profit margins moving forward.
Prospects are looking up for JA Solar (JASO) as well, as the company announced on Thursday that it has supplied 23MW of solar modules to a utility-scale photovoltaic project in the city of Lingwu, Ningxia province, China.
ReneSola manufactures and sells solar wafers and solar power products which include virgin polysilicons, monocrystalline and multicrystalline solar wafers, and photovoltaic cells and modules. These up-line solar companies are going to need more inventory of these materials to keep up with the demand they are seeing.
Emerging Asian markets play a huge role in this demand, as I remarked in a prior article. Therefore, I expect these Chinese solar stocks to continue to see a strong upside correction. The best time to buy stocks are when they become oversold from an overbought situation, as too many investors tend to buy stocks when they are overbought then tend sell them when they are oversold.
Take Apple's (AAPL) recent overbought situation as an example. Apple made a run from $385 all the way up to an overbought price of $526.29, then became oversold, dropping back down to $486.63. The current 2/17/12 price per Apple share is $502.12, which shows a proper correction. As a side note, I expect Apple's shares to smash through its recent 52 week high again soon because it is an undervalued company trading at an 11 times P/E.
Obviously, I am not comparing ReneSola fundamentals to a profit making power-house like Apple. ReneSola still has a long way to go to produce better profit margins in order to show itself as a good longer term investment.
However, taking a look at its 52 week range of 1.45 - 12.37, the correct technical share price of ReneSola should be around $6.18, so there is still a ton of upside left, not only in ReneSola, but other Chinese solar companies as well. I do not expect ReneSola to see its former highs set in 2011 anytime soon, but I do expect the share price to properly correct from its grossly over sold low of $1.45 to 50% of its 52 week high of $12.37.
Trina Solar (TSL), which also rallied on Friday, up $0.52 cents (5.70%) to $9.64, is trading light years below its 52 week high of $31.08. Trina should at least be trading around $15.00. The company has recently announced a $100 million term loan, which will be used to add about 500 MW of high-efficiency Honey cell and module capacity.
I am long ReneSola because I expect the company to smash analyst estimates and the shares to rally to over $4.00 very soon. It actually produces and sells the products to these other companies mentioned in this article for production of their top line products which are now seeing healthier demand.
Disclosure: I am long SOL.
Additional disclosure: This article is intended for informational and entertainment use only and should not be construed as professional investment advice. Always do you own complete due diligence before buying and selling any stock.