A Solar Stock Investment Plan For 2012

|
Includes: FSLR, JASO, LDK, STP, SUNEQ, TSL, YGE
by: Hawkinvest

It's been a rough year for solar investors and even though many solar stocks have rebounded off the recent lows, it still might make sense to use caution when investing in this sector. A recent Bloomberg article details news that Germany plans major cuts in solar subsidies:

Germany, the world's biggest market for solar power, plans record reductions in subsidies for the industry as part of a program to rein in a boom in installations. Environment Minister Norbert Roettgen said he plans to cut premium rates for solar power by between 20.2 percent and 29 percent from March 9 and decrease them further each month beginning in May. Plants larger than 10 megawatts won't get support after July 1.

On the positive side, many solar companies have recently cut production of polysilicon in response to an inventory glut. This has depressed the price per kilogram for polysilicon to a multi-year low in December. The production cuts already seem to be helping and the price per kilogram has started to rebound off the December low, around $26.

Solar stocks tend to soar when times are good and plunge to depths few would have imagined when the cycle hits a low point. This type of volatility creates major risks and opportunities. Most solar stocks have been battered and now offer compelling values for long-term investors. Investing heavily in solar doesn't makes sense to me because the industry is far to dependent on government subsidies.

However, a small and diversified investment into select solar stocks over the next few months, makes sense for some investors. While the industry has yet to bottom out completely, stocks often will bottom out many months before the fundamentals improve. The recent bounce many solar stocks have seen is also another possible sign that valuations are not likely to go much lower.

The surge in oil could stir interest in all forms of energy, including solar. Now it makes sense to consider averaging into some leading solar stocks on dips over the next several months of 2012. Here are some names to consider and one to avoid for now:

First Solar (NASDAQ:FSLR) is a U.S.-based solar company that was once the darling of Wall Street. A couple of years ago, this stock traded for over $250 per share, but due to challenging business conditions and a change in investor psychology, the stock now trades below book value, which is $46.61 per share. There is still plenty to like with this company. It has a technological edge over other companies, a strong balance sheet, and it is one of the few solar firms that have been able to remain solidly profitable during an extremely difficult period for the industry.

First Solar expects revenues to range from $3.7 to $4.0 billion, and earnings to come in somewhere between $3.75 to $4.25 per share for 2012. The company is expected to report fourth quarter earnings on February 28, 2012, so it could make sense to wait for a financial update before making a large investment. However, the stock is trading below book value, and for less than 10 times earnings. Investors who like buying low should consider this industry leader, while the stock is still trading at depressed levels.

Here are some key points for FSLR:

  • Current share price: $35.58
  • The 52 week range is $29.87 to $175.45
  • Earnings estimates for 2011: $5.85 per share
  • Earnings estimates for 2012: $3.75 to $4.25 per share
  • Annual dividend: None

MEMC Electronic Materials, Inc. (WFR) has a joint-venture agreement with China-based JA Solar (NASDAQ:JASO) and it manufactures silicon wafers for use in computers, solar, and other goods in the United States. This company has seen a sharp decline in profits due to the weakness in semiconductors and the solar industry. It recently announced a significant impairment and restructuring charge which resulted in a loss of $6.44 per share.

Without these charges, the loss would have been a more reasonable figure at about 36 cents per share for the fourth quarter. This stock was once a high-flyer, trading for over $90 per share in December 2007, when the market viewed the business more favorably. The vast difference in the stock price, highlights the cyclical nature of both the semiconductor and solar industry. With a restructuring plan in place and about $586 million in cash on the balance sheet, this stock has substantial rebound potential for long-term investors.

Here are some key points for WFR:

  • Current share price: $4.18
  • The 52 week range is $3.65 to $15.04
  • Earnings estimates for 2012: 13 cents per share
  • Earnings estimates for 2013: 61 cents per share
  • Annual dividend: None

Suntech Power Holdings (NYSE:STP) is one of the world's largest makers of solar panels. The company expects to post revenues of just over $3.1 billion for 2011, and it plans to release fourth quarter and full year results on March 8, 2012. Suntech hasn't escaped the difficult industry conditions and it recorded impairment charges of $571 million in the third quarter of 2011. This stock was also once a darling of Wall Street and it traded for over $80 per share in December 2007. Now it can be bought for about $3 per share even though it has made significant progress in driving down the cost of solar energy, as well as improving the efficiency of solar cells.

The company was recently included in Technology Review's annual list of the world's 50 most innovative technology companies. This company has a debt load which is of concern for some investors, however, the stock appears to have priced that risk in with the shares trading for a fraction of the current book value which is $8.90 per share.

Here are some key points for STP:

  • Current share price: $3.06
  • The 52 week range is $1.70 to $10.15
  • Earnings estimates for 2011: a loss of about $2.23 per share
  • Earnings estimates for 2012: a loss of about 83 cents per share
  • Annual dividend: None

Yingli Green Energy (NYSE:YGE) is one of the largest solar companies in China, and it recently announced that it expects to recognize an impairment charge of about $361 million and an impairment of goodwill for about $43 million in the fourth quarter of 2011. Yingli plans to announce fourth quarter and full year results for 2011 on February 29, 2012. It makes sense to wait for an update on the financial results from the company before making a significant investment. If the stock remains stable after earnings, it could be a positive sign that it has reached a bottom.

This company has a debt load which concerns some investors, but it is posting smaller losses when compared to other solar companies. When the solar stocks were at a cyclical peak around December 2007, Yingli shares traded for about $38 per share. Now the stock can be bought for less than one-tenth of that price. The impairment charges this company plans to take is a sign that it is making tough choices and possibly positioning it for a future rebound.

Here are some key points for YGE:

  • Current share price: $3.82
  • The 52 week range is $2.75 to $13.14
  • Earnings estimates for 2011: 38 cents per share
  • Earnings estimates for 2012: a loss of 36 cents per share
  • Annual dividend: None

Trina Solar Ltd. (NYSE:TSL) is one of the most respected solar companies in China. It has a strong balance sheet, especially when compared to many other Chinese solar companies. Trina Solar recently reported financial results for fourth quarter and full year of 2011. The loss for 2011 was $37.8 million, or 54 cents per share. Trina Solar is working to reduce non-silicon manufacturing cost to less than 60 cents per watt by the end of 2012, which will give the company a competitive advantage. This company is one of China's "blue chip" solar stocks, and it is likely to lead an industry rebound when it comes. With the recent financial report out of the way, and the stock below $8 per share, it appears be the right time to start buying in stages.

Here are some key points for TSL:

  • Current share price: $7.80
  • The 52 week range is $5.28 to $30.45
  • Earnings estimates for 2012: a loss of 40 cents per share
  • Earnings estimates for 2013: a profit of 68 cents per share
  • Annual dividend: None

LDK Solar (NYSE:LDK) is one of the largest solar companies, but it has a balance sheet that concerns me. According to Yahoo Finance, LDK has a debt load of over $3.5 billion and with the industry still struggling, that is too much risk for my tastes. The company expanded aggressively in the past few years, but that expansion now looks poorly timed. When the stock was trading below $4, I thought it made sense to do some bottom-fishing, but the shares have more than doubled from the 52 week low, and look vulnerable at these levels.

Here are some key points for LDK:

  • Current share price: $5.93
  • The 52 week range is $2.55 to $14.37
  • Earnings estimates for 2011: a loss of $1.10 per share
  • Earnings estimates for 2012: a loss of $1.18 per share
  • Annual dividend: None

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Data is sourced from Yahoo Finance. No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.