I am cutting back my large position in Trina
Solar (NYSE:TSL) even further based off the Sunpower (NASDAQ:SPWR) gross margins. I have sat here
aghast that despite pathetic margins last quarter 'investors' ran up the stock
40% last quarter, and Sunpower came in
this quarter with 16.4% gross margins. Another pretty pathetic performance when
competitors like Suntech Power are
coming in at the low 20s.
US investors seem to be in love with the revenue growth in this sector and not caring much about profitability; gross margins do matter, since without gross margins your entire P&L is stressed. Investors seem very drunk on revenue growth and think "in the end things will take care of itself," but with these stocks screaming, and the fact Sunpower did not raise earnings guidance (I contend because gross margins are under pressure) for 2008, it just doesn't sit well with me.
I am going to reduce my solar exposure. The Chinese solar companies have an advantage of cheaper labor so maybe they will surprise, but I don't want to take the chance. I am reducing Trina Solar from 600 shares to 200 shares. I had already been cutting these names Monday on the lack of price action. This sale takes Trina down from 3.4% of the fund down to 1.0%. Once again, if I am 'wrong', I can always buy back later, even if it comes at higher prices since the long term story should still be quite bullish.
Again, I am a long term bull on this sector but profitability matters (to me), if not for the lemmings who think if you sell 10,000,000 widgets at low profit its better than selling 400,000 widgets at high profit. To me, this sector seems to trade down around earnings (in general) when reality hits, then rises in the 2.5 months in between earnings reports as 'hope' replaces 'reality'. So with reality hitting the next 3 weeks I plan to be cautious and look for better entry points, after I get more information.
Long Trina Solar in fund; no personal position