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The Market and Solar Stocks

By Peter Lynch
Exclusively for InvestorIdeas.com
November 24, 2008

First of all, the market has simply put, been terrible. This is certainly shaping up to be a year for the record books. In fact, as of the close Friday (8-21-08) the Dow Jones is having the SECOND WORST year in its history, with 1931 being the worst year with a yearly loss of -52.67%. The numbers below reflect the performance of the three main market indexes since June 1 2008.


DJIA

Dow Jones Industrials

-36.3

SPX

Standard and Poor’s 500

-42.9

NASD

NASDAQ

-45.1

 

 

 

As to my opinion of this general market situation, I think it is either the beginning of very bad times or a generational buying opportunity in the market.

There is really no way to tell for sure, but based upon my experience in the market over the past 30 years and the opinions of numerous others that I respect, I believe we are very close to a great buying opportunity.  It is impossible to ever “catch” the exact bottom, but I do feel that most of potential future bad times have already been incorporated into current stock prices by the market. Therefore, barring a financial Armageddon, I think that prices will be significantly higher in 6 months than they are now.

Regarding my opinion on solar stocks, the numbers below reflect the performance of solar stocks since June 1 2008. Obviously there has been a near total collapse of the average stock which was brought on by a combination of: sky high P/E multiples, an insanely volatile general stock market and dire predictions of future industry progress.


Symbol

Name

Performance %

AKNS

Akeena Solar, Inc.

-73.9

ASTI

Ascent Solar Technologies, Inc.

-77.9

CSIQ

Canadian Solar Inc.

-89.8

CSUN

China Sunergy Company Ltd.

-87.1

DSTI

DayStar Technologies Inc.

-78.1

EMKR

EMCORE Corporation

-85.6

ENER

Energy Conversion Devices Inc

-66.9

ESLR

Evergreen Solar, Inc.

-77.4

FSLR

First Solar, Inc.

-65.3

JASO

JA Solar Holdings Co., Ltd

-90.1

LDK

LDK Solar Company Ltd.

-76.1

RSOL

Real Goods Solar, Inc.

-44.6

SOL

ReneSola, Ltd. (United Kingdom) ADR

-90.6

SOLF

Solarfun Power Holdings Co.

-85.8

SOLR

GT Solar International Inc

-83.38

SPIR

Spire Corporation

-77.1

SPWRA

Sunpower Corporation

-74.8

STP

Suntech Power Holdings (China) ADR

-85.8

TSL

Trina Solar Limited

-85.9

WFR

MEMC Electronic Materials, Inc.

-83.4

YGE

Yingli Green Energy Holding Company Limited (China) ADR

-86

 

 

 

   Average Loss = -79.31%

I agree that solar P/E’s and expectations were FAR too optimistic and missed a number of rather obvious problems that were rapidly approaching (i.e. coming silicon over supply), however, at this time I believe that current expectations have moved equally to the opposite extreme with FAR  too much pessimism.

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A great degree (a vast majority in my opinion) of this current activity in the market and in solar stocks is principally driven by FEAR.  People are afraid NOT to sell because stocks are going to ZERO and people are afraid to buy because stocks are going to ZERO. Obviously BOTH cannot be correct. But the point is that the market is currently in the phase of market dynamics that is totally dominated by emotions. These emotions are rampant and further fueled by the silly people in the media jumping on every tidbit of information and trying to draw a conclusion from each of them (which is impossible), thereby helping, in a way, to compound and extend the panic underlying this this crisis.

With this said is there a way to look at solar stocks today and try to “pick” the ones that have the most potential?  Once again, it is impossible to accurately determine which will be the winners and which will be the losers. However I think that there are at least three of areas an investor should look at that I would consider to be critically important. If a company possesses ALL three of these characteristics it would have much higher probability that it will be a leader in the next phase of the emerging solar boom.

First:  CASH.  During times like this CASH IS KING. So an investor will have to make sure to check each potential company’s balance sheet and insure that they have adequate cash reserves to carry them through at least 2009 without need of further financing.

Second:  RELATIVE STRENGTH.  In periods like this good stocks and bad stocks BOTH are carried down with the general market. However, the better stocks generally drop last and come back (when the tide changes positive) first. These stocks will also most likely be the ones with the most cash (best financial shape) therefore with the best future prospects.  As a result, an investor should look for the solar stocks with the highest relative strength compared to the general market - they will be the early leaders in the next market stage.

Third: PRODUCT DIFFERENTIATION. With a new industry like solar the longer term leaders are generally the companies with some form of competitive advantage or product differentiation.  Remember these companies may have innovative products, but they must also pass the first two hurdles (cash and relative strength) in order to warrant further consideration as an investment. Five examples of this (not necessarily “official” recommendations) are listed below with their respective “differentiator” to give you a better idea of what I am referring to:

  • First Solar (FSLR) – low cost market leader in the thin film sector
  • SunPower (SPWRA) - highest efficiency product, therefore potential leader in the space constrained residential market segment.
  • Energy Conversion Devices (ENER) – unique product, with high margins in the flexible PV market segment.
  • SunTech (STP) – low cost producer in the crystalline PV market segment.
  • Emcore (EMKR) – one of only two producers of very high efficiency PV cells for the Concentrating PV (CPV) market segment.

Remember that even though this MAY BE a generational buying opportunity in the general market and the solar sector you should always consider this as higher risk money and money that you can afford to potential lose and also be money that you can be patient with and allow the situation to work itself out over time.

Mr. Lynch has worked, for 31 years as an independent analyst and investor 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 field. He was the contributing editor for the past 17 years to the Photovoltaic Insider Report, the leading publication in Photovoltaics industry that was directed at industrial subscribers, such as major energy companies, utilities and governments around the world. He can be reached via e-mail at: solarjpl@aol.com or at his new website: www.sunseries.net.

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J. Peter Lynch has worked, for 31 years as a Wall Street analyst, an independent equity analyst and private investor, and a merchant banker to small emerging technology companies. He has been actively involved in following developments in the renewable energy sector since 1977and 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.

Disclaimer: The views and opinions expressed in the research published are those of the individual companies and writers and not necessarily those of Investorideas.com®, or any of the industry sector portals . At the time of publication, writers may hold positions in the stocks or companies mentioned.

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