Bookkeeping: Continuing to Build ReneSola (SOL) Into Earnings

I usually do not add exposure going into earnings; instead doing the reverse but for the 3rd time this week we are increasing our position in ReneSola (SOL) - this time from 3.0 to 3.7% of portfolio. You can see quite a breakout occuring here and we've been layering in on each jump up.

Monday evening after LDK Solar (LDK) crunched estimates we wrote

The most direct parallel to LDK Solar is ReneSola (SOL) which should benefit directly from such fantastic results. SOL is trading at a whopping 11x forward estimates.

We added it early the next morning to the portfolio - we wrote

As I said last night ReneSola (SOL) is most like LDK Solar, in that its an "arms supplier" - both supply wafers and both mostly sell in country (to China) so they don't have much currency exposure. Therefore I've initiated ReneSola with a 1.8% stake, with purchases this morning in the $14.50s. For that last position there are some caveats - I expect some serious earnings growth in a pure dollar sense, but they did a dilutive offering and hence the share count will be up. Further, they are somewhat capacity constrained until 2009 so upside might be somewhat limited but as of last night it was trading at 11x forward earnings for triple digit forward growth. Ridiculous. ReneSola reports August 19th.

So the one key here is that SOL sells mostly to customers in country - hence there is a lot less currency risk than the module makers right now. As we've seen with both Yingli Green Energy (YGE) and Canadian Solar (CSIQ) - they were goosing earnings the last few quarters with some huge currency gains. No one cared to analyze it and as long as Briefing.com shouts "beat by XX cents!!" everyone rushes in to buy - but there is a difference between OPERATIONAL gains and CURRENCY gains. The latter has nothing to do with how well a company is performing. So that currency gain reversed this quarter and it beat the momentum guys (those who only read headline numbers) who piled in right ahead of earnings on the butt. Anticipating that we had reduced Canadian Solar going into earnings which was a good short term move as the stock proceeded to drop 8% immediately after announcement.

As discussed a quarter ago many of these module makers were getting a huge currency benefit; people didn't care that this had nothing to do with their operations - they just saw the headline press release and saw big numbers and ran up the stocks. Yingli Green Energy showed the effects of what happens when currency goes against you as they had a $20M swing from 1 quarter to the next which is equivalent in their case to $0.15 of EPS (on a $0.23 base) - for that reason I am cautious on Canadian Solar (CSIQ) going into earnings tomorrow so I've cut back that position on this morning's 8%+ spike. I am cutting back the position to 0.4% of the portfolio and will determine after I see earnings tomorrow if it will remain part of the basket. While I like these module makers for the long run, speculators run in and out of them based on how much they beat earnings (as you can see from LDK Solar this morning)

Now neither Yingli or Canadian Solar suddenly turned into poor companies - but in this momentum chasing era people pile in and out of stocks based on expectation of an earnings beat - so I took that into account and seeing that the chance for an upside "surpise" could be hurt by currency exposure, took the calculated chance that people will be "disappointed" and cut back exposure. So to ignore that behavorial fact is to leave a tool in our tool belt. I find the valuation in both these names to be very attractive here, but they've been left to die on the side of the road since everyone judges these guys on 90 day increments and if they don't "beat" by a huge amount they might as well go to purgatory. It is all sort of pathetic that this "Vegas" behavior is how it works, but it is what it is.

Anyhow the point is not to brag about a solid short term move - but to point out that ReneSola (SOL) should not be impacted negatively due to where their customer base is mostly located; since most transactions are within China - obviously there is no gain or loss from currency for selling within the country. While I don't expect the same level of beat as LDK Solar, ReneSola presents (to me) the safest Chinese earnings play this quarter due to not being blindsided by a large currency hit that makes earnings look worse than they really are. That does not mean they cannot "miss" or "disappoint" - it simply a case of less chance of it happening with SOL than the module makers.

So along with a chart that is busting out we are increasing our position and will be victims of either lemmings charging in or out of the name post earnings. I'm just crossing my finger they don't announce a dilution or something like that since we've been blindsided by these type of events in the past. Even with this huge move during the week the forward PE ratio has only jumped from 11 to 14. For triple digit growth. This entire group is sadly undervalued by a market chasing into financials and retailers and unprofitable airlines.

On a related note - analysts, who have been very short sighted in solar; constantly bashing the companies over incentives here, there, or everywhere - i.e. Germany, Spain, or the US - finally cried uncle on Sunpower (SPWR) at least. These guys (analysts) continue to "cry chicken little" in one of the fastest growing sectors on the planet. Our Congress remains a complete disaster.

• However, analysts noted the deals are contingent on Congress extending expiring income tax credits for solar energy. "The commitment by PG&E is a wake-up call for Congress to act on extending the ITC when it returns from recess," Calyon Securities analyst George Kotzias said in a note to investors Friday. "We feel that acts like this are exactly what is needed to light the fire under the feet of our federal policy makers."
• Calyon rates SunPower shares a "Buy" with a price target of $100. Merrill Lynch on Friday raised SunPower to "Buy" from "Hold."
• Citigroup analyst Timothy Arcuri was not quite as upbeat on the prospects for SunPower. In a note, Arcuri said it appears SunPower "is racing to sign big deals -- even at the eventual expense of margins -- ahead of lower-cost suppliers" like First Solar Inc. (always a negative to throw in - so they sign a huge deal and they are "racing to sign big deals" - in what other industry is "signing big deals" a negative?? Classic stuff) Arcuri rates SunPower "Hold" with a $90 price target.

Long LDK Solar, ReneSola, Candian Solar in fund; long LDK Solar, ReneSola in personal account