Battered Solar Stocks to Ride the Market Higher

Editor's note: See comments for clarification regarding currency conversion and income statements.

I believe that the market is generally going up for the short term. This may be a near term bottom, or it may even be the real bottom for the year. The economic news that we will hear in the next three months will likely determine that. That is why it is so important for Congress to act on the stimulus package as expeditiously as possible. They cannot give tax rebates immediately. However, they can raise the limits for conforming loans immediately. This will have a nearly instantaneous salutary effect on housing sales and prices in high priced areas, especially since interest rates are going down. The market is expecting a further rate cut by the Fed of .25 to .50 basis points when it meets on Wednesday.

The S&P500 (SPY) looks like it finally found support at the 1260 (1250) level last week. It proceeded to go up following the Fed’s rate cut on Tuesday. Then it plunged again Friday. Some people might think that this means the market is giving up again. They are wondering if people are selling into any sign of strength. However, it is not likely that this is the case. Or at least it is not likely that this will go on for very long. Rather the news was just so bad last week that the market finally had to go down, even though the equity markets were rebounding from a big fall.

Let’s review what bad news really happened last week. On the financial front there was the news of the rogue trader scandal at French bank, Societe Generale (SCGLF.PK) (a $6B loss). Then there was Goldman’s (GS) layoff announcement. Many interpreted this as a sure sign of economic hardship ahead. If you spin it, it may just be GS thinking they can replace their worst performing employees (bottom 5%) with better ones from the many laid off by other companies. By itself, it does sound bad though.

Earlier in the week there was news of the spreading of the subprime problems to Europe and China. China’s news was particularly bad. They have exposure to the U.S. subprime market. They have subprime problems of their own making. They have exposure to devaluing U.S. securities (T-bills, bonds, etc.). They have a likely cut back in orders from their biggest customer, the U.S.. China could easily catch the U.S. subprime cold. Perhaps they already have. Thus the Europeans, the Chinese, etc. are all hoping (for their own sakes) that the U.S. can resolve its subprime problems quickly. Bush is being pressured, which means Bernanke is being pressured. This is good for the immediate term view of the market. The bad news last week may actually have been good news for the rate cut outlook.

Adding to the bad financial news was the bad political news. There is continued political unrest in Pakistan after Bhutto’s death. There is a major offensive against Al Qaeda in Iraq, which is not bad news per se; but it may have an adverse impact on U.S. troop withdrawals. Most simply the Iraqi situation represents uncertainty. Something the markets react badly to. There is more trouble with the Taliban in Afghanistan. There is the Palestine/Egypt/Israel situation, which looks like it may explode at any moment. With all of the above bad news, it is no wonder the U.S. equities markets sold off on Friday.

Still the U.S. equities markets should recover this week. The earnings news was generally good last week. Microsoft (MSFT) was clearly the standout, but many companies did well. The PCE inflation data doesn’t come out until after the Fed decides about its rate cut, so there is nothing to stop the Fed from cutting again. Rather the Fed needs to cut again. It is no longer just question of letting investors take their medicine. It is now a question of the U.S. leading the world into a worldwide recession. It looks like the decision has been made at the highest levels to do everything the government can to help the U.S. and the world avoid that recession. This means the Fed will cut again. This will spur investment in the economy. It will help prevent further foreclosures/bad loans/big banking losses. It will make homeowners feel wealthier (more likely to spend money in retail stores) because it will help to stop the erosion of home values. Together with the raise in the conforming loan limit (in the House’s stimulus package proposal), this may provide the turning point for the real estate market, especially in higher priced areas of the country. At this point it looks like the bigger rate cut (.5 basis points) would be better.

Does this mean the market will go up today? No, it doesn’t mean that. The market may have a hangover from the bad news of last week. It may take a little time to recover. It may play possum today for the Fed. Certainly the performance of the world markets on our Sunday (their Monday) will have an impact on the market direction on Monday. Overall it does look like the S&P500 may find support at the 1325 level (or failing that the 1250 level). Then it will go up when the Fed cuts again. Perhaps it will go up earlier. The U.S. is still the world economic leader. The good news that should come from the U.S. this week should lead the market upward as the week wears on. If the Senate can avoid tinkering with the bill proposed by the House/Bush, they should be able to pass it quickly. I am hoping that they realize that the quickness of their actions may be much more important than one or two specific additions to the bill. There is always time for further action later.

There will definitely be some bargains out there. The shipping stocks should perhaps be one of the biggest beneficiaries of the “good” economic news. The Baltic Dry Index was down again last week, but look for it to go up this week if the economic news is “good”. Oil and alternative energy stocks should also benefit. The solar companies with the most riding on a good economic climate should do particularly well. Two of the battered ones with low FPE figures are Solarfun (SOLF) and Canadian Solar (CSIQ) (FPEs of 1.87 and 13.05 respectively -- data from Yahoo Finance). One analyst is actually predicting a $268 price for SOLF by the end of the 2008 year. The mean price target for SOLF is $147. This is quite a difference from the current price of $16 and change. The market is still very worried, so fundamentals are starting to play a bigger role than pure sentiment. More wary investment sentiment should shift to these more fundamentally sound solar stocks.

Specifically some analysts seem to have downgraded SOLF due to its lack of full disclosure. They may have a point, or they may just be downgrading it because it is not making their lives easy enough, by providing them will all of the information the average MBA wants. This “cover your ass” mentality has to be very prevalent on Wall Street right now. This may not make the MBA analyst’s advice the most beneficial advice to listen to at this time – only time will tell. However, for those who are not too risk averse, SOLF and CSIQ do seem to have a definite appeal at their current values.

Disclosure: Author holds positions in SOLF, CSIQ

Comments

[User 59428]

The projected price of SOLF and CSIQ sounds so much like a pump and dump article to me. Something one will see on a message board.

[David White]

User 59428: To the extent that I may have an interest in hyping the stocks, that is a fair statement. However, I think the article is a fair assessment. These two stocks should be particularly subject to economic fluctuations. They are "retail" level solar stocks, which do not have stratospheric FPE's. If retail is failing, they will do worse than the predictions. This will be tempered to some degree by the fact that we are talking about the global economy with respect to these stocks, which is doing generally much better than the U.S. economy. If the Fed and Congress take actions to substantially reduce the downside economic risk in the U.S., these stocks should be big beneficiaries. Hence you might expect these two battered stocks to rise, especially if the Fed cuts again on Wednesday (and the Congress quicklyraises the conforming loan limit as well as enacting the rest of the stimulus package).

[galewhitaker]

There is no mention of energy prices in this piece. Its not at all clear that the world economy can survive $90 oil. The affects of $90 have not been fully felt by the majority of industry. It seems obvious that higher gasoline prices are going to stop the consumer from spending. When the consumer stops buying cheese doodles and flat screen TVs this economy is going into the dumper.

[David White]

Let me add that I did not make up the numbers from Yahoo finance. Someone else, presumably reputable put them there. Thus this does not have one of the qualifications for a pump and dump sales pitch.

[sinned-eel]

Mr. White,

The EPS you are quoting from Yahoo Finance appears to be in yuans, not USDs. Is this correct?

[David White]

Gale: I think it is almost a given that energy prices are being driven higher by supply and demand. The global economy is growing at a faster pace than the U.S. economy. It needs oil to keep growing. This will continue to put upward pressure on the price of oil, barring a technological breakthrough in energy. Solar may be able to supply part of that technological breakthrough. Hence solar benefits to some extent from high oil prices. The higher the price of oil, the more economically sensible solar looks.
Also the price of oil is not high for all countries. It is high for net importers of oil. Exporters of oil are benefitting. Many countries such as Brazil and Venezuela keep their internal prices for oil much lower. Virtually all OPEC countries benefit from high oil prices. What is a negative for some economies, most notably the U.S. economy, is a positive in others. Since the U.S. is by far the biggest importer, it is financing the growth of the other economies as its money goes to other countires to pay for oil. Many European countries are in the same boat.
The Europeans seemingly are realizing their predicament more quickly than the U.S. Germany, Italy, and Spain lead the world in the adoption of soalr power. The U.S. is actually a laggard. Most of the solar business is outside of the U.S.
As for the U.S. buying flat screen TV's, it would be a benefit to the U.S. economy if it did stop buying flat screen TV's. They are almost all made outside of the U.S.. Purchase of these items adds to the trade deficit. All of this money flows out ot the U.S. economy to stimulate the economy (economies) of other countries. We need to stop buying so many flat screen TV's, or we need to start making them ourselves. Then the money could stimulate out economy. Perhaps the cheese doodles are going to your head.

[David White]

Sinned-eel: It would seem that Yahoo should be conistent, and generally they are even in the cases of ADR's. However, in the case of SOLF you are correct. The actually FPE should probably be in the 10-11 range for 2008 earnings. This is still an excellent range for a high growth stock. My apologies for being inconsistent.
Each yuan is worth about 17 cents. However, when you consider that Paulson and others are trying to get China to let the yuan rise (and other currencies are rising compared to the U.S. currency), this figure, by the time it becomes a P/E is likely to be significantly lower due to currency appreciation (a lower P/E being a good thing).

[tessant]

stp and wfr - ride the big boys back up. not the clown stocks like csiq, solf...

scott w
growthportfolio.ning.c...
"where social networking meets investing"

[David White]

tessanf: no reason to be derogatory. WFR is certainly one of the most reputable solars. It is a good stock. STP is good also. However, these "clown stocks" as you call them have FPE's in the 10-13 range. STP has and FPE of 25. WFR has already announced 2007 Q4 earnings, so its FPE is for another time period (not comparable until the others announce). Of the two you mentioned WFR definitely seems like the best. It is a great stock. A lot of solars should do well based on further rate cuts.