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Solar Stocks Pull Back

By Peter Lynch
Exclusively for InvestorIdeas.com
March 12, 2007

Last week solar stocks dropped, along with the rest of the market in general, when the market suffered its 8 the worst single day point loss in history. It was nowhere near as significant a percentage drop, probably not even in the top 25 of the last 50 years, but it sure scared a lot of people.

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What caused this sudden drop?

There were all sorts of reasons given by the financial press, most prominent of which was the sudden drop of 8.8% the night before in the Chinese market. Did the Chinese market drop “cause” the sudden decline in the US market, or was it merely the “trigger” or “excuse” that the US market has been looking for quite awhile.

As I said in my last column on February 12 th:

I think the overall market is also overextended and has gone far too long without a significant correction. It is currently pushing all sorts of historical records without a significant (10%) correction. There is far too much optimism around, given the real world problems facing the U.S. This is certainly NOT a low risk investment environment.”

So in reality it was not the Chinese stumble that caused the market to fall it was – TIME.

The market prior to the fall had gone the longest period IN HISTORY without at least a 2% correction and the second longest period in history without a 10% correction. So the market was LONG OVERDUE for a “healthy” correction and all it was waiting for, was some sort of “excuse” or event to ignite the fall. It was merely a real world example of, “what goes up must come down”.

When the market dropped so did most stocks, but solar stocks were hit especially hard. They were pulled down by the market but, in addition, for an additional reason - SPEED.

The same thing works with “speed” as with “time”. Some stocks and markets can get overextended by going up for a long period of time without a correction, or, as in the case of solar stocks, they get ahead of themselves and go too far too fast. As I also said in the February 12 th column:

“I think the majority of solar stocks are over-extended and are due for a correction. So I would do no new buying at this time. Solar stocks has run “too far, too fast” and need to take a breather.”

Solar stocks had literally exploded upward with all the news about global warming and new solar incentives literally popping up all around the world. They were making decent ANNUAL gains in weeks, obviously too far too fast.

Lessons To Be Learned

So what can investors learn from this short, turbulent recent market and stock activity, especially in regard to solar stocks and the future of solar stocks?

1. Corrections are Normal

Corrections in markets and in individual stocks are normal and healthy parts of market action. They serve, at least, two purposes:

1. They allow the consolidation of gains, which is necessary in order to build a

solid base for future gains and;

2. They allow smart investors an opportunity to buy good stocks on a pullback,

rather than at an overextended point.

2. When Things Go To Well for Too Long, watch out!

Don’t let the popular press mislead you into thinking that just because the DOW is breaking records, that everything is fine. You have to use good old common sense and the abundance of excellent information available on the internet to determine for yourself (it is YOUR money) whether it is a higher risk environment or a lower risk environment. Don’t get sucked into buying stocks that are overextended and long overdue for a correction.

3. Try to Learn from the Correction

What can we learn from a correction like the most recent one? There are a number of things we can learn, some of which I mentioned above. But there is another point I would like to elaborate upon – Relative Strength. In my last column, I mentioned:

I would be careful to select the companies that are: the most financially strong (have plenty of cash), have strong management and have the best “relative strength” to their peer group (solar stocks) and to the market in general.”

How do you determine “relative strength” and how is it measured? Basically relative strength is how a stock acts relative to other stocks in its same industry and how it acts relative to the overall market. One of the “hidden” benefits of a market correction is that it sometimes enables an investor to see the strongest stocks more easily - the strongest relative strength stocks will usually recover the fastest after a correction.

After the past correction, I looked at my list of solar stocks to see which ones bounced back the strongest, after the fall. Here is a list of the top four solar stocks (in no particular order), with the best relative strength among their market sector.

1. Q-Cells (QCE-FF)

2. Conergy (CGY-FF)

3. First Solar (FSLR)

4. Suntech (STP)

** OCE and CGY trade on the Frankfurt stock exchange in Germany. FSLR trades on NASDAQ and Suntech trades on the NY Stock Exchange.

In addition to very strong relative strength, all four of these companies have excellent management and very strong financials. They will probably be among the strongest companies as this industry grows and expands over the coming years and ones that should be watched as potential industry leaders.

J. Peter Lynch has worked, for 30 years as a Wall Street analyst, an independent equity analyst and private investor, and a merchant banker in small emerging technology companies. He has been actively involved in following developments in the renewable energy sector since 1977 and is regarded as an expert in this area. He is currently a financial and technology consultant to a number of companies. He can be reached via e-mail at solarjpl@aol.com.

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