By Amy Baldwin
Five years ago, solar was expected to become the next great industry. The stocks within the space all traded in excess of fundamentals and investors believed that growth would continue to explode. However, the unexpected occurred, and demand drastically began to fall in both the U.S. and in China, which created market-leading losses for the industry. However, in recent months we have seen a boost from this space, and therefore I am looking at three of the more popular names to decide if any are worth your due diligence.
The largest and the so-called leader of the pack is First Solar Inc. (NASDAQ:FSLR). In 2007 it was considered one of the fastest growing companies in the world. But after trading with an overvalued valuation and seeing several years of underperformance the stock had sunk and reached a deeply discounted price compared to its fundamentals. Even despite its 115% gain during the last six months it still trades with a five-year loss greater than 85%.
If First Solar (FSLR) is truly staging a comeback, then it remains one of the best value plays in the market regardless of its six-month gain. The stock first teased investors back in August after announcing very strong earnings that showed both progress with its new projects, signs of a successful transition to a company more focused on projects, and finally an earnings report that blew away all expectations. However, there are still signs of trouble, as the company has laid off more than 2,000 workers and Europe continues to be a struggle. The good news is that FSLR is priced for destruction, and because of its progress, it might be a good long-term investment for those who can withstand the volatility, and believe that its recent progress is a sign of what’s to come.
China was the reason for both the solar industry’s large rise in 2008 and its demise of the last four years. And Chinese based companies such as JinkoSolar Holding Co., Ltd. (NYSE:JKS) have been among the most affected, with a 70% loss since January 2011. In the last three months it has seen a spark, rising 70%.
With the cost of solar panels being lowered in China, new investments in China, and JinkoSolar’s recent financing deal with China Development Bank, JinkoSolar looks well-positioned for the next couple years. However, keep in mind, this is a high-risk high reward investment. The balance sheet of this company is horrendous and the market is highly unpredictable. However, the company is valued with an incredible cheap 0.15 times sales, indicating that it is a stock with very low expectations. As a result, with the recent progress, this is an intriguing stock, one that might be wise to monitor.
LDK Solar Co., Ltd. (NYSE:LDK) is another Chinese solar company similar to JinkoSolar. It presents the same risks and the same rewards as a company that is at the mercy of Chinese solar policy. However, in many ways it is even cheaper than JinkoSolar, with a price/sales of 0.12. And despite an enterprise value of $3.15 billion, it trades with a market cap of just $152 million.
The upside for this company is quite high, but in terms of safety, it does have a frightening balance sheet that must be cleaned up. On Wednesday it was LDK Solar that helped push the industry higher, as it announced that it has entered discussions with creditors to give the company financial flexibility. This news complimented the recent news of JinkoSolar’s financing deal and shows that financial institutions are confident enough in the future of solar to lend large amounts of money. If approved, and the immediate risk of bankruptcy is alleviated, then LDK Solar could climb much higher.
If you are considering an investment in solar then there are a few things you must consider. First, the balance sheets of most companies are poor. These are all companies that were positioning themselves for decades of growth and competition, and when it did not occur, each was left with the mounting costs and operational challenges. Second, much of the upside is tied into both Europe and China. And while Europe remains a disaster, the Chinese government has ramped up its investments, solar subsidies, and installation targets in recent months. Therefore, an investment in this space is almost an educated guess, or prediction. However, because of the valuations and deep losses, the potential upside is great and could be rewarding for those with the patience to endure the volatility.
Disclosure: No current postions.