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Bubbles and Inverse Bubbles

|Includes:ASTI, CRM, CSIQ, CSUN, ENER, ESLRQ, FSLR, GE, JA Solar Holdings, Co., Ltd. (JASO), JKS, LDK, LNKD, NFLX, PCLN, SOL, SPWR, STP, SUNEQ, TSL, YGE
Pin piercing bubble
All bubbles eventually collapse. This happened to dot coms, housing, Dubai and oil in 2008.

All inverse bubbles reflate. This happened to most stocks from March 2009 until now.

Despite this, the market never learns from the past. No matter how many bubbles we’ve had, we will always have new bubbles.

In addition to market-fuelled bubbles, Ben Graham, Warren Buffet’s mentor, has written about Wall Street manipulating stocks up and down many times over the decades, pushing them into bubble and inverse bubble territory.   But, the manipulation can last only so long before the true value of the company is reflected in the stock. According to Ben Graham, all stocks eventually reflect fundamentals and a company's ability to generate PROFIT.

Would you buy a lemonade stand for $1,000 if it generated $1 profit per year? You would, if you knew that a greater fool will buy it from you for $1,100. But, eventually fools run out and all bubbles collapse.

The reverse also happens. Would you sell a shoe store for $10, if it was generating $3 profit per year? You would if you knew that everybody else is selling shoe stores for less than $10. But, eventually fools run out and logical people will want to buy your shoe store. This is because it would take 1,000 years to recoup their investment in their lemonade stands, whereas it would take less than four years to recoup yours.

1,000 years to recoup your investment? Does that sound so extreme that it’s ridiculous?

Some numbers:

Revenue in 2010 (approx.):

JA Solar: $1,790 million
LinkedIn: $243 million
Priceline.com: $3,085 million
Netflix: $2,163 million
Salesforce.com: $1,657 million
(LinkedIn’s numbers are from data.cnbc.com/quotes/LNKD/tab/7)

Revenue growth from 2009 to 2010:

JA Solar: 211%
LinkedIn: 102%
Priceline.com: 32%
Netflix: 30%
Salesforce.com: 21%
(LinkedIn’s numbers are derived from from data.cnbc.com/quotes/LNKD/tab/7)

P/E:

JA Solar: 3.12
LinkedIn: 1,560
Priceline.com: 45
Netflix: 70
Salesforce.com: 311
(P/Es are from Yahoo Finance on May 20, 2011. LinkedIn’s P/E is based on EPS for 2010)

(Assuming that both JA Solar and LinkedIn have flat growth, it would take less than four years to recoup your investment in JA Solar from earnings and it would take 1,560 years to recoup your investment in LinkedIn.  In 1999, dot coms and technology stocks had similarly ridiculous valuations. It became so ridiculous that AOL bought Time Warner. Eventually, the bubbles collapsed and their P/Es came into line. This happened to even the biggest companies, such as Cisco and Microsoft and their share price has never gone back to their 2000 peak. The same thing will likely happen to bubbles such as LinkedIn and Salesforce.)

If JA Solar had the same P/E as Priceline.com, its price would be $80
If JA Solar had the same P/E as LinkedIn, its price would be $2,795.

However, as of May 20, 2011, JASO is at $5.59. This is a perfect example of an inverse bubble.  (I’ve used JA Solar here to serve as the example, but many Chinese solar stocks are in similar situations.)

Furthermore, JA Solar (NASDAQ:JASO) gave explosive, crystal-clear guidance for 2011 that is backed by law (50% growth in 2011 with 90% of the 2011’s sales already under contract).  How many companies can say that?

Can Wall Street Analysts show one non-solar company with numbers similar to JASO’s?  I’ve challenged Herb Greenberg of CNBC and Eric Rosenbaum of TheStreet to this, but no reply.  Nobody can name one company. Read more at:

http://seekingalpha.com/instablog/872074-curt0/143971-is-wall-street-manipulating-solar-stocks

Critics (manipulators?) argue that the European market is shrinking for Solar companies. However, they rarely mention that the Chinese, Indian, American and Canadian markets are growing. China plans to double solar usage by 2015 and increase it by 400% by 2020: 
http://etfdailynews.com/2011/05/18/china-solar-power-sunny-days-ahead-for-solar-etfs/

They argue that high P/E companies are growing fast and therefore their P/E will shrink because E is expanding. However, what is the probability that their E will expand so much to the point of bringing their P/E down to something reasonable such as 15? The probability that the Chinese solar companies will do this is over 100%, because their P/E is already much lower than 15. If you buy a company with a P/E of 300 or 1,500, are you investing, speculating or gambling?

The premise with most bubbles is that most speculators believe that the price will always go up. This was the same premise that American homeowners had.