Confessions of a Shallow Solar Trader

by: Alphameister

Why do I refer to myself as a "shallow" solar trader? Because I make little in-depth effort to figure out, at this stage of the solar curve, which companies and stocks will be the biggest long-term winners and which are likely to lose their ability to compete at some point. I love all the Chinese stocks in this sector, but I'm a fickle lover quick to shift my allegiances from week to week based on constantly shifting valuation ratios and chart patterns. I'll rely on the numbers and the charts to steer me to the long-term winners.

My love of the solar sector begins with my belief that the world faces a serious energy shortage that will persist for a very long time notwithstanding a certain amount of demand destruction in the face of high prices. The search for new oil/gas reserves is in the early stages of a secular bull market as one vector of addressing the shortage. Alternatives to carbon-based fuels will prosper even more handsomely into the distant future as people seek to deal with environmental issues at the same time they seek to alleviate energy shortages.

Among alternative energy opportunities, solar is my first choice. I had formed this opinion even before reading a provocative report by Nathan Lewis to the Materials Research Society entitled "Powering the Planet," but that report greatly strenthened my conviction that energy is the place to be as an investor and solar the place to be as an investor/trader. As Lewis observes, Willie Sutton robbed banks "because that's where the money is." I like solar because the sun is where a virtually inexhaustible and clean energy source can be found. The sun dumps more energy onto the planet in an hour than all the energy consumed on earth during a year, according to Lewis. There are obviously serious space and efficiency limits entailed in tapping into this mega-source of energy, but anyone familiar with the history of technology advances should have a high level of confidence that those challenges will be met over time.

I can understand the P/E applied to the explosively growing earnings of First Solar (NASDAQ:FSLR), but as a GARP (growth at a reasonable price) investor, I am unable to buy the stock. I like Sunpower (NASDAQ:SPWR) also, but I've preferred to own it at a lower level of risk through Cypress Semi (NASDAQ:CY), which is attractive in its own right and is considering a spin-off of its huge stake in SPWR.

I really love the Chinese solar stocks, almost without exception. They seem to be ideal opportunities for a GARP investor seeking diversification away from a stagnating US economy. Last year, CY was one of my largest holdings until its chart became asymptotic in October when I sold most of my holdings. I hadn't been following the Chinese solars at that time because of concerns about the reliability of their financial reports. But as I began to investigate this group early this year, I became hooked. Chinese solars have become the largest single sector in my portfolios, though the composition of that overall position often changes dramatically from week to week.

While I described myself as a GARP investor, my major accounts are sheltered from taxes, so I love to trade attractive GARP stocks. I might also have titled this article "How I Prosper Selling Solar Stocks Well Below Their Fundamental Value." When any stock deviates by two standard deviations or more from its trendline, I am going to be selling all or part of my position in that stock even if I deem the stock undervalued. So the high volatility of Chinese solar stocks further adds to their appeal. I believe that most of these stocks would not be overvalued at two or three times their current price levels, but closing that gap will not happen overnight. And since these deeply undervalued stocks typically score their best gains in response to individual bullish news developments, only to give back substantial parts of those gains when the buying subsides, there are always attractive alternatives when a particular stock runs "too far, too fast."

Loving the sector rather than one or two particular stocks in the sector makes it so much easier to maximize gains from this sector. After selling heavily in mid-May, I added to my Renesola (NYSE:SOL) position today below 21 based on great fundamentals and the most attractive chart in the group. I like Trina Solar (NYSE:TSL) very much on fundamentals (though I sold a large chunk on the latest earnings report) and I see it building a base near 36; I'm likely to be adding to this position in the next week or two. I have a large stake in Yingli Green (NYSE:YGE) and smaller stakes in Evergreen (ESLR), Canadian (NASDAQ:CSIQ) (after selling half my position on the recent upward guidance), and CY. I sold all of my Solarfun (SOLF) on its run to the high 20s last month but I rate it a buy now at 19-20 technical support.

Disclosure: Author holds positions in some of the above-mentioned securities