I am cutting back my large position in Trina Solar (TSL) even further based off the Sunpower (SPWR) gross margins. I have sat here aghast that despite pathetic margins last quarter 'investors' ran up the stock 40% last quarter, and Sunpower came in this quarter with 16.4% gross margins. Another pretty pathetic performance when competitors like Suntech Power (STP) are coming in at the low 20s.
US investors seem to be in love with the revenue growth in this sector and not caring much about profitability - gross margins do matter as without gross margins your entire P&L is stressed. Investors seem very drunk on revenue growth and thinking "in the end things will take care of itself" but with these stocks screaming, and the fact Sunpower (SPWR) did not raise earnings guidance (I contend because gross margins are under pressure) for 2008, it just doesn't sit well with me.
So I am going to reduce my solar exposure - now the Chinese solar companies have an advantage of cheaper labor so maybe they will surprise but I don't want to take the chance. I am reducing Trina Solar from 600 shares to 200 shares. I had already been cutting these names Monday on the lack of price action. This sale takes Trina down from 3.4% of the fund down to 1.0%. Once again, if I am 'wrong', I can always buy back later, even if it comes at higher prices since the long term story should still be quite bullish.
Again, I am a long term bull on this sector but profitability matters (to me), if not for the lemmings who think if you sell 10,000,000 widgets at low profit its better than selling 400,000 widgets at high profit. To me, this sector seems to trade down around earnings (in general) when reality hits, then rises in the 2.5 months in between earnings reports as 'hope' replaces 'reality'. So with reality hitting the next 3 weeks I plan to be cautious and look for better entry points, after I get more information.
Long Trina Solar in fund; no personal position
Thursday, October 18, 2007
Reducing Trina Solar (TSL) by 2/3rd Due to Sunpower (SPWR)
Posted by
TraderMark
at
9:35 AM
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4 comments:
Any thougs about Trina´s +6% gain in friday?
Well on the positive side it recaptured its 50 day moving average Friday . On the negative it has not been acting well for a few weeks. Unfortunately it reminds me of how NII Holdings was looking technically before it reported - middling performance in an up market. Hence I am taking a cautious stance and just playing the odds - generally when stocks are not acting well, they telegraph ahead of us some "not so great" news. Nothing is foolproof, again I am just playing probability and risk mitigation. It could surprise me, and have a great quarter but I am suspect when nearly every stock in the sector has had a great quarter of stock price improvement, and Trina has lagged by a huge margin. So I remain cautious and will re-assess post earnings. If it pops without me, that's ok - this is why you have a portfolio of stocks. I just don't feel the same confidence in Trina as I do in many other names, either in that sector or other sectors so I don't want to risk a large drop in stock price.
Still nothing positive for TSL?
Once it broke past $54 it turned better technically, I blogged about that on the Suntech Power post yesterday.
With that said, TSL is the last remaining value in the sector now that STP has run. How is that for positive. BUt I still wonder why it remains the only value.
THe short story right now to me is "solar" is in a near term bubble as retail investors and hedge funds chase the sexy thing. Near term fundamentals are not cared about. I suspect these companies will report relatively suspect gross margins this quarter but say "things are going to get better in the future as polysilicon drops" At this point in the mania for solar thats good enough for investors to keep driving them up. Aside from TSL I cannot buy any of these in good conscience as their valuations are now ridiculous.
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