LDK Solar: Is the Sell-Side Analysis Valid?

I was looking through the upgrades/downgrades section of Yahoo on selected stocks last night. Have any of you wondered - I'm being serious here, not facetious - that the word "downgrade" means: "We would like to accumulate this stock. Please sell." And that upgrade means: "We own lots of this stock. Please buy." (?)

I think the real truth is somewhere in between. Investors can run with their emotions, especially when the market is at extremes. They buy high and will sell low, at the bottom, in despair. Analysts who are attuned to street opinion get caught up in these moments and infuse their stock opinions with contemporaneous fears and euphorias. Any correlation between downgrades and good buying opportunities, however, should be just circumstantial, a comment on human nature rather than evidence of collusion. But analysis is supposed to be more than that. Analysts are supposed to provide accurate forecasting models. A buy should be a buy and a sell a sell.

Two years ago, Lam Research [LRCX] had had several downgrades beginning in April 2005 and extending through January, 2006. During this time the stock had gone up a 100%. Yet the analysts at the time seemed to believe its investment appeal was continuously dwindling. What were they looking at as the stock ran higher and higher? Recently LDK Solar (LDK), the wafer maker, has been cut to under perform by one brokerage and the dreaded sell by two others. Yet it's growing revenues sequentially over 50%. It's slated to double production and revenues for each succeeding year through 2009. They've gained almost $2BL in contracts in the last eight weeks. That seems like a lot to like, not a lot to sell.

The downgrades have helped drive the stock down to multi-month lows. Are these downgrades just a ploy for accumulation, or are they authentic opinions?

I did a study of QLGC one summer and determined that if you had bought at every downgrade and sold at every upgrade (for the previous 5 years) you would have been right on the direction of the stock 90% of the time. That's a powerful forecasting tool!

I think the calculations and extrapolations of many sell side 'analysts' express prevailing short-term moods and subjective sentiments, or those held by their colleagues or bosses. In other words, they are talking about stocks within the box and hearing the echo effect. This is a serious charge. It means that expensively-paid and highly regarded economic analysts - some of the brightest statistical minds academia can graduate - alums from Yale, Princeton, Harvard, and the Wharton schools of business who were hired by Merrill, Morgan-Stanley, and Citi, etc - are unable to escape herd mentality.

What made them the tops in their university class in the first place? The ability to sense the mood of their mentors - their professors and advisers - and to meet that mood with the appropriate response (the dutiful student). In other words, they have spent a lifetime learning to think "within the box". And this educational pedigree makes a lot of them unable to think imaginatively or originally - or to take the "contrarian view". As one investment banker humorously (and proudly) told me, he had crushed all creative instincts (risk) out of his character by the time he was 10.

True research - the real thing - is based on counting and sifting through grains of data to get a vision of a company with a forecaster's eye. The operative question is, "What's all this data telling me?". Research is an entirely different thing from looking over your shoulder and seeking collegial consensus on a company's prospects. You can't serve two masters: truth and the herd. It reminds me of the story about the "Emperor with no clothes" and how his staff (surely not lower class toadies right?) appraised the emperor's eminent garb when in fact he was naked! Robert Kiyosaki (author of Rich Dad Poor Dad) says about financial analysts, "You have to kiss a lot of frogs before you find a prince."

Academic economics departments have a hubris which can work against their best interests. The clearest example of this is the LTCM (Long Term Capital Management) bust of 1998. How many Nobel Laureates (with advanced degrees) resided on that staff, and how many hundreds of millions of dollars did they lose because they thought they could "outsmart" Mr. Market. Was it because they were 'Nobels' ? Or because they were deer in the headlights?

----------------------------------------------------------------------------------

When I was younger and looking for an adventure (and a draft deferment too), I traveled back and forth across the U.S. for 5 years; plus overseas, as a deckhand for the Danish merchant marine. I had recently graduated from college and was only twenty-one years of age when this odyssey began. Along the way I had the privilege of meeting some amazing characters.

One such was an inventor who picked me up as I hitchhiked beside Highway 1 in Big Sur, California. He struck an engaging profile and the topic of his conversation soon turned to business. This man had won and lost two fortunes before he met me. He said that when he regained it the third time he knew it hadn't been luck the first two times. He commented that the single biggest danger of the college grads (who worked for him) was they'd spent 6-8 years learning how to tell someone else what that person wanted to hear (he hadn't gone to college). "How can a person learn to think with their own mind if someone else teaches you the answer he wants to hear, say a teacher? You gonna tell him something he doesn't want to hear?"

We talked about his ideas and his overflowing encouragement while sitting around a camp-fire in Big Sur with his young wife and children (His first wife had left him after an economic failure. He said that that was a lesson in itself.) The source of all his entrepreneurial creativity was his ability to think for himself.

I'll conclude this missive with a nod to Steve Jobs, probably the best tech entrepreneur and pioneer of this generation, and refer you to his autobiographical comments in the commencement address to Stanford's graduating class of 2005. The points he makes throughout this address could best be summed up in the proverb below.

If I am not for myself, who will be for me;
And if only for myself, what am I;
And if not now, when?

Read Steve Jobs' words. You won't be disappointed.

Comments

[omooc:]

While I share your view on LDK and your disdain for Wall Street analysts, I think I need to add a "balancing" (a term used in contract bridge) view. These analysts, no doubt, are well trained; one must attribute their lack of objectivity to their lack of independence -- after all, their earn their paychecks from their employers. On students at leading universities, I think you are completely off-base. I am a Wharton graduate; my professional career was mainly (I am retired) a university professor (30+ years). As a graduate student, I cared less what my fellow students were aimed at; as a professor, I expected each student to on his/her own. omooc

2007 Oct 24 11:36 AM

[oceandude:]

Perfect example of dumb herd-minded analysts is a little stock called GOOG. Remember the IPO? The old-school was scared and threatened of a fairly structured (yet different) IPO. There was downright pessimism about GOOG and its $85 IPO price.

Agreed on everything with this article. I picked up a small amount of LDK today and will try to acquire more.

2007 Oct 26 02:58 AM

[nancy:]

John, I loved the study on QLGC. This is a great article and great advice about being true to yourself at all cost (thanks for the reminder). As far as LDK....I'm 100% behind them. I have a Scottrade account and they use Reuters as a research tool. Their current analysis is rating LKD "Outperform".

2007 Oct 28 10:41 AM

[JIM:]

Your writing and reasoning is the the clearest, most cogent stuff I've come across on this board.

Hope you're right about LDK.

Takes an amalgam of courage and fear to hold fast when others are slipping off the deck, sailor... Tenacity is a virtue.

2007 Dec 15 11:11 AM

[Iam Phree:]

Most point their fingers at the analysts negative sentiment and conclude that they were correct based on stocks performance. But if you read deeper, the only reason the analysts got it correct is that the market crashed. Not one of these analysts cited an impending market crash for the reason to justify their downgrades. So what am I getting at? They were lucky! And luck doesn't fly! To a large degree, we conclude that the analysts actually got it wrong based on their reasoning processes and right based on unforeseen external circumstances. If their reasoning process has failed, what credibility do they retain?

We also have to look at the possibility that the firms they work for may have a vested interest. Could it be that the analysts are in a position where a conflict of interest may be at play? I think this is what you are getting at. "Want a job, then do as I say or imply." mode of operation.

Continued negativity without a down market to hide behind will not work for long. So the bets are on of virtually all investments, when will the market turn? Hard to say, but Obama is pro-alternate energy. At least for solar, I believe the worst is over. Solar may in fact lead in the market recovery.

While all this played out, LDK has actually accelerated plant wafer operations to facilitate an overbooked manufacturing capacity in 2009. What does this tell you? It tells you they have a booming business and with polysilicon manufacturing about to turn on, their margins will improve significantly. 2008Q4 time frame offers a rare opportunity for a LDK investment.

We are dealing with billions in revenue and margin improvements of 50%. I'm not recommending waiting for the analysts to figure it out.

2008 Nov 30 07:17 PM