I haven’t written about one of the profligate predictions from the Cabot crowd in a while, so the headline about “double your money in 2011 guaranteed” caught my eye.
The pitch for their “secret” idea is in an ad for their Cabot Stock of the Month newsletter, which they use to pick ideas from one or another of their various newsletters each month — if you don’t know the Cabot folks, they publish a number of investment newsletters, most of which use what they’re now calling the “OptiMo system” that seems based on momentum and technical indicators to pick growth stocks (they also have a Ben Graham value newsletter and some others).
And their latest ad tells us that they’re targeting a stock that’s “beginning to look a lot like First Solar, which landed us a 321% gain.”
I don’t know when they picked First Solar (FSLR), but for that kind of gain I assume they must have bought it in early 2007 and sold it in mid-2008, before all of the solar stocks fell apart with the market crash. Since then the stock has continued to be volatile, bouncing up and down roughly between $100 and $150 or so (it has broken out above that recently) and FSLR is, by a pretty wide margin, the biggest publicly traded solar stock in the world, and the standard-bearer for solar stocks everywhere.
So who is this heir to the First Solar throne and “another big doubler” according to the Cabot analysts?
They make a fundamental argument for solar stocks first, that demand is substantially higher than when these stocks started their big run four years ago; and that demand will continue to double annually for the next three years.
But then they get into the details of this company a little bit:
“… our OptiMo system is now seeing a bigger breakout for out newest solar acquisition, thanks to the company’s vertical integration—profiting not only from manufacturing chips but also from supplying competitors.”
OK, so it’s vertically integrated and a supplier — presumably a wafer or polysilicon supplier. That narrows it down a little.
Then we get a little bit by way of financial details to help us narrow it down further:
“So it’s no wonder that the past three quarters, revenues grew 23%, 148% and 140% from the year before … or that the profit margins continue to lead the industry … or that management is predicting that 2011 revenue will hit $3.6 billion, 50% higher than the $2.4 billion in 2010.
“That’s why I highly suggest you add our February Stock of the Month to your holdings before it declares earnings March 28. “
That’s certainly enough to feed into the gaping maw of the Thinkolator and allow us to expect some solid answers, but we’re also told that the stock is up 30% since the start of the year, and 150% since June of last year. So what is this stock that “you won’t want to miss” per the Cabot-ians?
Thinkolator sez: LDK Solar (LDK)
I can’t say that I’ve been following this pick of late, or any of the solar stocks for that matter, but I do remember their first breakout as a Chinese silicon supplier, and the accounting controversy that helped to crush their stock back in 2007 and 2008 (after they had a huge runup and been teased by Robert Hsu pretty close to the top). And they lost a ton of money in 2009, I assume in part because of the collapse in polysilicon prices when new supply came online, so that didn’t help either.
Back in 2007 they didn’t actually make solar cells, but they do now — and from a quick look at their website, it looks like they’re planning a substantial expansion in production this year of both cells and modules (they’re not increasing their polysilicon/wafer production nearly as much, so I assume they’re going to sell less to third parties and use more for their own business). They did a dilutive follow-on stock offering just this week for another 13 million shares or so, I assume that was to raise money for expansion or to pay down debt (of which they have quite a bit, the enterprise value is roughly 50/50 debt and equity).
The teased specifics match up just fine — they did see earnings grow 140% in the last quarter (that’s year over year), and the revenue tease is in the ballpark after they substantially upgraded 2010 and 2011 guidance last month. I don’t know about them “leading the industry” in terms of profit margins, their net profit margin is far worse than Trina Solar for the last four quarters, for example, but they could easily have better margins for some period, or for something more specific like gross margin — given the specific match on everything else, I didn’t dig into the margins much to check.
And yes, they do report earnings on March 28 — and analysts are quite optimistic. The company dramatically beat earnings expectations for the first three quarters of 2010 and did just lift their guidance in January, so analysts have raised estimates for this last quarter and for 2011. They now expect 77 cents in earnings on March 28, for a total of $1.75 on the year (three months ago, analysts were expecting just $1.10 for 2010 earnings, so that 50%+ bump up in earnings expectations is probably why the stock has climbed so dramatically in recent months). Those same analysts see the growth continuing, with $2.18 in earnings in 2011, though according to the Yahoo Finance compilation of estimates analysts are projecting far less in revenue than the company has guided for this year ($2.9 billion analyst forecast vs. $3.5-3.7 billion guided), so if the company is right there may be more room to raise estimates.
They also project ongoing growth at 25% for five years, to go along with this current year’s breakout 190% growth, but that number almost never means anything — how on earth could they know? It’s almost impossible to estimate earnings for the current quarter without solid company guidance, so estimating what they’ll earn in five years is ridiculous. I’m not saying there are dartboards in these analyst’s offices, I’m sure they’re extrapolating trends and making seasoned judgments, but they’re almost certainly going to be ever wrong-er the further out in time they go with their estimates.
So if you’re doing the math, at a $13 share price we’re looking at a PE of about 7 on 2010 earnings (last three reported quarters, plus the predicted 4Q) and just a hair under 6X projected 2011 earnings. That sounds pretty cheap, but it’s more or less in line with similarly-sized Chinese solar stocks like JA Solar (JASO), Suntech Power (STP) or Trina Solar (TSL), which probably tells you how investors feel about Chinese solar companies right now, and how much trust they place in estimates of growth and profitability for that sector — “once burned,” you might say.
I don’t know enough about any of those stocks to tell you whether LDK has an advantage of the others in manufacturing, design, or distribution, though I don’t think those three are vertically integrated like LDK (supplying their own polysilicon wafers). Whether that vertical integration means anything big for the bottom line probably depends largely on polysilicon prices, and whether the world, or China in particular, returns to higher pricing now that so much new production of the raw material for solar and seminconductor wafers has come online — I’ve seen estimates that the oversupply in polysilicon will remain, keeping prices restrained, for the next couple years, but if demand for solar cells grows that number can probably change quickly.
So that’s about all I can tell you about LDK — what do you think? Ready to invest in solar again, with hopes that the world pushes for more clean energy with oil prices again on the rise? Looking for a double in LDK like Cabot is? Or are you chary about the sector, or about LDK in particular, following their years of wild swings? Let us know with a comment below.
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