Investors who wish to generate positive returns on securities need to be both contrarian and right on their calls. Further, an investor who has true "alpha" needs:
1. to have a performance spans over many years
2. to be able to survive market panics, and
3. to outperform the index
This list comes from Oaktree Capital's Howard Marks, who wrote a memo about how to assess fund managers.
There were 5 buy and sell calls made recently that were contrarian. In three of the five cases, the calls were wrong because the call required a "macro" forecast that was later proven to be inaccurate. These wrong calls warrant further discussion.
First Solar (FSLR)
First Solar was a wrong call.
First Solar was discussed on February 20 as a buy, but dropped by over 25% after reporting its earnings. First Solar closed recently at $30.02 and is down 11.08% year-to-date. During its earnings call on February 28, the company reiterated the rapid decline in solar market subsidies in Germany. The passing of a proposed bill against these subsidies would potentially eliminate the solar market for First Solar in that country. The company took a $100M charge for the cost of idling plants in Germany and postponing plant building in Vietnam.
First Solar also took a $125.8M charge in warranty reserves for products delivered between June 2008 and 2009. Other reported figures worth noting are:
· Conversion efficiency of 12.2%
· costs per watt of $0.73
· Net sales of $660 million, down from $1 billion in the previous quarter
· Gross margin of 20.9%, down 16.8%
Investors who think there is upside will look to the company's shift in focus towards India, China, Southeast Asia, the Middle East and Latin America. A slightly lower guidance from the company of $3.7B - $4B for 2012 is also a positive. The company anticipates that sales will not weaken, resulting in excess inventory. Longer term, First Solar is working towards 14.5% efficiency and a cost per watt of $0.50 to $0.52.
Trina Solar (TSL)
Trina was a right call.
Trina was indicated as a sell on February 26. Shares fell slightly since then, closing at $7.65. A bright point for Trina was its polysilicon costs, which is $0.30 per watt or $45/kilo. The company forecast this cost to fall further than the average selling price (or ASP) drop. Trina anticipates the China market size to be up to 5 gigawatts. Trina showed it was confident that it can be competitive in this region by including sales forecasts in China in its current revenue outlook.
Ford Motor Company (F)
Ford was a right call.
Ford shares are still down 21.08% from the 52-week high, closing at $12.72. In its monthly sales conference call, Ford increased its U.S. unit sales volume to 1.15M vehicles, up from 1.13M units in the previous month. For 2012, Ford said that it could have up to 14M - 15M unit sales (seasonally adjusted).
Ford's strong company performance appears to be on solid footing. The company added capacity, expects its "Focus" line-up to generate new sales records, and offer additional upside as economic conditions in the U.S. continue to improve.
A word of caution: the rise in oil prices threaten Ford's recovery, If the rising energy prices are due to the improving American economy, then Ford should be able to report strong results for 2012.
The call to avoid these companies was wrong.
Bank of America was considered a stock to avoid at the start of the year. Citigroup was also considered as a stock to avoid. Since then, shares in Bank of America rallied from $6 to $8.13. Citigroup closed at $34.10, up 29.66% in 2012. This happened because worries about the Greek crisis subsided, scrutiny in Bank of America's balance sheet declined, and stock markets as a whole rose. Year-to-date, Bank of America is up 46.49%.
The stock rewarded contrarian investors who saw little downside. Conservative investors who shunned the financial sector had to settle for a return of "just" 9% from the S&P.
Are Bank of America and Citigroup still a buy? Investors buying either financial stocks are betting that speculation is here to stay. Currently, the stock market as a whole is in "risk-off" mode. Take, for example, Yelp's (YELP) IPO. The stock rose 63.87% on its first day of trading. Facebook (FB) will be publicly traded in a few month's time. As long as traders remain optimistic for speculative securities, the bank sector will benefit from higher trading and fees.