“My Current Solar Stock Recommendation” Navellier

By Travis Johnson, Stock Gumshoe, April 23, 2008

I’m not entirely sure when this ad was sent out, or exactly what the context was, but I was sent a snippet of it from a reader just recently and thought I’d share.

The ad is for Blue Chip Growth, Louis Navellier’s large cap growth newsletter (according to Hulbert’s calculations, this newsletter has handily beaten the market over the past 3, 5 and ten year periods, though it’s worth noting that it usually carries a very large number of individual stocks in its portfolio … so individual subscribers might not match those returns).

Here’s the little snippet that was sent to me:

“An interesting thing happened to my current solar stock recommendation. Even though the company’s profits rose more than 11-fold to 15 cents per share, analysts still weren’t happy. They expected earnings of 35 cents per share! Are you kidding me? Honestly, if Wall Street had been a bit more realistic about what we can all expect, then on Thursday they would have been celebrating this company’s success, instead the stock took a small hit to its ego. I think it’s only a matter of time before Wall Street comes to its senses and realizes that when a company not only reports that its first-quarter revenue increased 92%, as well as raises its second-quarter and full-year guidance, then that stock’s on fire. Check out my Blue Chip Growth newsletter to get the name and full buy advice on this solar stock!”

So … not exactly a bucket full of clues, but, the Sun God be praised, the Thinkolator is on the case … this stock pretty well has to be …

SunPower (SPWR)

Remember when this company seemed like kind of a flaky side project investment for T.J. Rodgers, CEO and founder of Cypress Semiconductor? i guess that ages me a bit, SunPower has been the engine behind Cypress’ stock for several years, and Cypress still owns more than half of the shares (which is reflected in the market caps — CY has a market cap of about $4 billion, SPWR about $7 billion. Almost all of CY’s market cap can be explained by it’s ~52% stake in SPWR).

As with many solar stocks, SPWR is right in the middle of a sort of inflection point on earnings — we’re now at the point where solar stocks are expected to be profitable, and possibly even reasonably valued as solar energy comes closer to parity (thanks to subsidies) with the electric grid, and big government incentives continue to increase demand for “green” energy and spur installation growth. That is reflected in the fact that SPWR has a trailing PE well into the 300s, but a forward PE of only 26.

SPWR did report 15 cents a share of earnings just last week, which was lower than some analyst estimates (though the average estimate I saw was not quite so dramatic as Navellier’s tease indicates), and they did grow revenues by 92% last quarter. The outlook was somewhat conservative, which is probably why the shares tailed off a bit after the announcement, but it also could have certainly just been profit taking — the shares had almost doubled in the previous month. Navellier’s recommendations are quantitatively derived, with a big emphasis on earnings growth and momentum, and this stock does get an “A” grade in his system.

There’s a pretty good article about the earnings, with some detail and with explanation of the stock movement, here from the Mercury News if you’re interested.

SPWR and Suntech Power (STP) have been the standard-bearers for solar power in recent years — SunPower because it has had the most efficient cells, STP because it had the lowest costs. That may well be changing gradually as relative upstarts like FirstSolar, the thin film solar developers, and the lower cost Chinese companies try to build market share. Still, the market is growing so quickly that there’s something to be said for owing the big dogs who have the clearest accounting and a strong product track record like SunPower.

I have no idea who’s going to win the solar wars, and in fact I sold my only related company a few weeks ago (MEMC Electronic Materials, sold for personal portfolio reasons, not because of any immediately bad prognosis I see for the company), but I would probably be more comfortable with SPWR than with some of the smaller or more highly-valued companies in the sector. And truth be told, since Cypress is likely to track with SPWR at a lower valuation until the rest of their SPWR position is spun off, I’d probably buy CY before SPWR (that’s assuming that the underlying semiconductor business has some value, a position the market in general doesn’t seem to accept at the moment). CY has gotten some recent tax decisions that make a spinoff of the rest of SPWR to shareholders likely at some point, though I don’t know that a timetable has been set.

Everyone, it seems, has an opinion on solar stocks — I know Jim Cramer yells at anyone who suggests a purchase of anything other than First Solar … and several touts have picked SunPower in the past year, including Andrew Gordon for a 50% gain if held until now. Navellier also picked SPWR earlier this year, at closer to $120, so that pick has a 25% haircut at the moment.

But it’s your money — what’s your call?

[poll=4]


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Woman with Portfolio
Guest
April 23, 2008 2:36 pm

He may well have been referring to SPWR in his teaser, re the recent earnings report, but FSLR is a much better prospect if you’re looking at U.S. solar heavyweights. And he has touted FSLR in the past. Don’t have time right now to elaborate, but will later.

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Gravity Switch
Gravity Switch
April 23, 2008 3:54 pm

Thanks WWP — FSLR is certainly even more popular, and larger. Though at that valuation they better continue growing sales at way better than SPWR’s 92% (last quarter sales for FSLR was near 300% growth, earnings 600%). FSLR is three or four times the market cap of STP and SPWR, and the valuation scares me, but it is certainly one of the few consistent high momentum growth stories in the market right now. It has gotten to this point because of the lower cost technology they use that doesn’t rely on polysilicon, prices of which have gone through the roof.

I don’t have anything bad to say about FSLR, other than the fact that the valuation is a bit scary high even if it is justified, but do note that they have a $20 billion market cap on $500 million in sales. SPWR and STP are both close to a $7 billion market cap on around $1 billion in sales. Investing in FSLR assumes that they will maintain much higher growth and higher margins than their silicon-based rivals for many years. Which they might, I don’t know. FSLR, like SPWR, gets the “A” grade from Navellier, STP gets a B.

Not arguing in favor of any of these three, by the way, just sharing some personal perspective. I don’t own any of them.

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Woman with Portfolio
Guest
April 23, 2008 6:11 pm

Gumshoe, sorry for the earlier hit and run. Your analysis, as usual, is clear, reasoned and very smart. And of course you hit on the crucial element of FSLR’s growth — its thin film technology that doesn’t depend on silicon. But I do agree with you that it’s at the scary stage of valuation. I wouldn’t recommend buying it myself. What’s really scary to me, though, is SPWR’s balance sheet, the insider selling and the shortsters that are on it. FSLR is the better of two iffy propositions. I don’t own either. I still have some shares of STP, which to me is the better stock in the long run. I did sell most of my shares at a pretty hefty gain before Chinese stocks sank into the sunset. Some analysts have made a good case for Yingli Green, but I can’t quite bite yet.

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Gravity Switch
Gravity Switch
April 23, 2008 8:16 pm

Thanks for the additional comments, WWP — all good points. I suspect that the short position is betting on a significant overhang of supply if and when CY spins off the rest of their SPWR holdings, but it could just be a valuation bet — those shares did climb awfully fast, and there is always some fear that the solar stocks could collapse, at least for a time, for political reasons (failure to extend tax breaks or pass new ones, either in the US or Europe). I haven’t looked at the insider selling, though I’m always less worried about that than I am interested in insider buying … and it’s true that they are one of the few solars with any debt (not a problematic amount, by any means — but many of the solar companies have so recently gone public that they haven’t ever borrowed money). The balance sheet wouldn’t worry me much, the overhang of shares might (though any CY holders at this point would probably be there for the SPWR exposure, not because they are big fans of Cypress’ semiconductor business).

Thanks again.

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Jackie
Guest
Jackie
April 24, 2008 9:45 am

I am buy Cypress that is for sure.
Regards
Jackie

Patrick
Guest
Patrick
April 24, 2008 11:08 am

Nanosolar, which isn’t publicly traded, seem to have a fundamental technological edge in terms of cost and panel throughput/efficiency.

singh
April 25, 2008 6:03 am

DSTI agreement with JUWI Solar maybe bad for FSLR. They supply to them now

Hawki
Hawki
April 26, 2008 4:27 pm

I am new to this site but already like it. I have been looking at solar … recently and happened across a company that is just starting out: AVA Solar
I would like to take advantage of this site and ask if anybody has heard good things and if so if they offer stock.

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