(i) US based
(ii) 'established larger Chinese companies
(iii) speculative smaller Chinese companies which have already run afoul in their short public history on US exchanges.
Note that while LDK Solar (LDK) shows a 15.9% return, before this recent controversy in the name, the stock had reached a peak of $74 or 100% return.
My focus for this fund has been in the two 'best values' in the sector, Suntech Power (STP) and Trina Solar (TSL). Unfortunately those two have been far and away the laggards in the group, with returns of 10.3% and 8.9% respectively. While I would not place any of the 3 speculative solar stocks into this type of fund without seeing a better track record in the future, I could of bought a basket of those 3 'laggards' and averaged 34% return. Or bought a basket of the 2 US companies which I thought were overvalued back in August, and also returned 34%.
However, I chose to focus on 'established' Chinese solar stocks - of which there are 5. Two of them (LDK Solar and Yingli Green Energy) returned 100%+ and the other I did not choose (JA Solar) returned >50%. So in this case I would of been better served to throw a dart into this sector and choose - it would of outperformed my 'thinking' and 'analysis'.
Suntech Power (STP) is a mystery - all this stock does is perform quarter after quarter, it is the leader in China, with highly regarded management and while (relatively) expensive in valuation, it trades at a massive discount to its US peer Sunpower (SPWR). I didn't expect fireworks from this name but I expected better than 10% when the speculative names (which are busy firing and hiring new CEOs, CFOs) are returning 34% on average.
Trina Solar (TSL), while faltering at its last earnings with a lower than expected gross margin, also in large part has been a disappointment. While almost all other names in the sector have been making new all time highs day after day, this stock remains 20-25% below all time highs. It's valuation is the lowest in the group on 2008 estimates. Yet it has yet to respond.
Worst, Trina is most like Yingli Green Energy (YGE), a stock I soured on back in late August despite liking it operating prowess. I owned 2000 shares which I sold in the low to mid $14s. That cost me (if I had held the shares the entire time, which I would not as I'd be selling off pieces as it rose) $35,000 or fully 3.5% of performance for the entire fund off this 1 name alone. So here is a case of identifying the right stock, than overthinking the situation and/or overthinking relative to the 'average investor' view on the stock.
I wrote back in August:
First, this was Yingli's first public quarter. I came impressed with the depth and breadth of their first earnings report, especially as a Chinese company. Some others I have read through from foreign companies lacked about 70% of the detail that Yingli was kind enough to provide.
Second, operationally I think Yingli appears to be doing very well all things considering (polysilicon shortage in the sector). Revenue growth is tremendous. Capacity expansion is on track. Gross margins are holding (22.7% in most recent quarter), whereas some other players are seeing dips to upper teens or worse. ASPs holding steady, whereas some other players are seeing some substantial dips.
Operationally I like the company. I like their guidance for 2nd half gross margins to hold at these levels. They have 50% of their polysilicon secured for 2008, despite massive expansion plans. I like their focus on Spain (80% of sales last quarter) which allowed them keep ASPs (Average Selling Prices) steady since Spain is not seeing the reduction in gov't subsidies that the biggest world market for solar power, Germany, has been showing.
However my concerns were:
YGE is a recent IPO - therefore their last quarter they used a weighted average share count, instead of their full share count - which basically means if a company goes public on the 45th day of a quarter (90 days) their average weighted share count in their first public earnings report would be half of the true number. So on the earnings report just published they showed 79M outstanding shares, when the real number is closer to 127M.
Second, they have a confusing and not yet measurable (or at least clearly measurable) preferred shareholder dilution coming up, which could expand outstanding shares even further than the 127M. What exactly the number is, Yingli would not share on the call, despite being peppered by an analyst on the question. He speculated 180M. That is not a good thing.
Stocks are eventually measured on earnings per share. The more shares, the more diluted each dollar of earnings becomes. I remember when Yingli first IPO'd I was dismayed at the huge amount of shares they were bringing public - many companies of this size start with 20-40M shares. Yingli went with the nearly 130M. Hence their earnings growth (per share) would be stunted, despite huge pure earnings growth potential.
That was well over 100% ago. So I was obviously 'early' which is a nice way to say 'wrong'. Yingli still has to report their next earnings since I wrote that and while the above may indeed prove to be true, and investors 'surprised' by some of the data that will come out, if the stock drops 25% from a $32 level that is still a $24 stock or about 65% higher than where I sold the stock. And that is taking a huge leap here that investors even care about such minor things such as 'earnings' when momentum is the only thing that seems to matter in this sector.
To put into perspective, by the end of 2008, about 15 months from now Yingli Green Energy and Trina Solar will be roughly the same size company, doing the same thing, at similar margins - per both companies management's projections.
However, as of this moment Yingli, at $32.30. is valued at 47x its 2008 estimate of approx $0.69 while Trina, at $57.50, is valued at 17x its 2008 estimate of $3.45. So we have quite a dichotomy here - the major difference is the 6 month lockup period for insider selling has not yet arrived for Yingli and Trina disappointed the street with a negative gross margin surprise last earnings.
So again, the stock market says I was very wrong with my assessment of these 2 stocks, and it continues to tell me this daily as Yingli shoots up day after day, while Trina fumbles around in a tight range. After both companies report in the next month I will re-assess the situation, but here is one case where identifying the correct sector was simply not enough.
Long Trina Solar, LDK Solar, Suntech Power in fund, no personal positions
