A milestone passed last month, by neglect rather than intent, but I'll record it here, nevertheless. Our subscription to Barron's expired, and we declined to renew it. What makes this notable is the fact that we've used the paper for 37 years! The few numbers that we use for our market timing indicators are found in Saturday's Wall Street Journal, and we stopped reading the articles long ago, so that's that. Now it will be interesting to see what new owner Rupert Murdoch does with the publication.
And now on to the market. The Dow hit a record high this week, and commentators told us it was because fears of a recession were fading. Well, they've got to write something, but the reality is far more complex than that.
It involves the panic-stricken market bottom back on August 16, when selling due to the sub-prime mortgage and credit crunch panic climaxed and 1,132 stocks on the NYSE hit new lows.
It involves the Fed's interest rate cuts.
And it involves thousands of professional investment managers, who have been accumulating shares in growth companies ever since.
In general, I like this trend and I think it has a long way to go ... but there are two risks to be aware of today.
The first is market risk. While the rebound over the past six weeks has been awesomely profitable for leading stocks - the ones being driven by institutional buying - the breadth of the market is not quite good enough to allow me to relax. I still fear that a "re-test" of that August low may still be possible.
If it comes, it will provide a great buying opportunity, and for that reason, I'm still advocating that you hold a little cash.
The second risk is individual stock risk, which is especially acute now that earnings season is upon us. In the "good old days", before Sarbanes-Oxley effectively silenced all whispered communications, the news about a company would usually leak out in the days and weeks ahead of a report, and by reading the charts, you could get into good stocks before the earnings pop ... and get out of some bad stocks before the earnings collapse.
But now, with the leaks stopped, surprises, both good and bad, are the order of the day. On the upside, the result can be action like Ciena (CIEN), which roared ahead earlier this week when management said the current quarter is shaping up better than originally expected.
On the downside, the result can be like Circuit City (CC), which two weeks ago disappointed analysts by announcing that revenues had failed to meet their expectations, and that it had lost 38 cents a share, far more than the expected loss of 12 cents per share. The result, a four-day plunge from 11 to 8.
The cure, since we can't easily roll back Sarbox, is to play a little more cautiously in this season, and if you're a growth investor, favor stocks - as always - in uptrends.
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One of the strongest group of stocks today, and one of my old favorites, is Solar Power Stocks!
I mentioned these many times earlier this year when they were among the market's leaders. And I'm happy to report that they're still among the leaders today!
So I'm going to resume writing about them because I can't think of a bigger market opportunity than the one these companies are addressing.
On one hand, you have ExxonMobil, British Petroleum and Chevron, with a combined market capitalization of $928 billion. They're big, but they're dinosaurs; the first two saw negative revenue growth in the latest quarter, while the third saw revenue growth of 4%. They're also in the middle of the pollution/global warming issue, and their exposure there is substantial.
On the other hand, you have the little solar power companies; the combined market capitalization of the biggest three is just $21 billion, 2% the size of the big three oil companies. And their average revenue growth rate in the latest quarter was an eye-popping 357%! Of course, this growth will slow in the quarters ahead, but there's no escaping the fact that these companies are creating a product the world desperately wants. In the years ahead, as these solar companies improve their ability to harness the free, non-polluting energy of the sun, I have no doubt that their market capitalizations will grow tremendously.
So which ones do you buy? Today it seems appropriate to compare them to kindergartners. Back in January, when their "school year" started, they all looked promising, but as I've gotten to know the class better, it's become clear which kids are developing more rapidly than others, and it's already easier to identify which among them might become the high school valedictorian.
The "average" kids, to get them out of the way, are the ones that are not hitting new highs. They're Canadian Solar (CSIQ), China Sunergy (CSUN), Evergreen Solar (ESLR), Solarfun (SOLF) and Trina Solar (TSL).
Unclassified yet, because it's only been public two weeks (it's like a student whose parents just moved into town), is Akeena Solar (AKNS), an installer of solar power systems in California, New York, New Jersey and Connecticut.
But sitting at the front of the class are the standout leaders! Every one of them is in a strong uptrend. Every one of them has hit a new high this week. And the five of them that are producing product are growing revenues at triple-digit rates.
So here they are, in alphabetical order.
Ascent Solar Technologies (ASTI) is based in Littleton Colorado, and has just 18 employees ... no sales and no earnings. But it's developing thin-film solar cells that use copper-indium-gallium-diselinide on a flexible plastic substrate. The market loves this, because it means that far less of the expensive and increasingly hard-to-find silicon is used ... so investors have bid this stock up to a market capitalization of $177 million (nearly $10 million per employee!).
First Solar (FSLR) is the leading purveyor of thin-film solar cells and modules. Located in Phoenix, Arizona, it has 723 employees, and its valuation of $10.1 billion works out to $14 million per employee. The company, whose stock has been in Cabot Market Letter's Model Portfolio since March, is both profitable and fast-growing. For the second quarter, revenues increased 177% to $77.2 million, while earnings jumped from a loss of $0.04 per share to a profit of $0.07.
JA Solar Holdings (JASO) is located nominally in the Cayman Islands, but it's really a Chinese company, which makes silicon-based cells and sells them to companies that assemble them into modules. The market cap of $2.1 billion and employee count of 619 work out to $3.4 million per employee. In the second quarter, JA Solar grew revenues 399% to $60.0 million, while earnings soared 320% to $0.21 per share. JASO has a great chart; it earned a spot in Cabot Top Ten Report 10 days ago.
LDK Solar (LDK) is a specialist; this Chinese company makes the silicon wafers and sells them to manufacturers of solar cells. Suntech and Solarfun together buy over half its output. In the second quarter, revenues soared 716% to $99 million while earnings jumped from a penny a share to $0.27 per share. With a market cap of $7.1 billion and some 3,000 employees, that's $2.4 million per employee.
SunPower (SPWR), located in San Jose, California, designs, manufactures and installs solar power products for both residential and commercial use. What makes its systems different is the aesthetically pleasing all-black appearance, possible because the electrical connections are on the back. Revenues grew 218% in the latest quarter to $174 million, while earnings jumped 127% to $0.25 per share. Its market cap of $3.4 billion and 1,750 employees work out to $1.9 million per employee.
Yingli Green Energy (YGE) is the third Chinese company in the top six; it's vertically integrated, producing solar power systems for home, business and industry. And it's growing fast; in the second quarter, revenues grew 179% to $118 million, while earnings (unusually) fell 13% to $0.07 per share. Its market cap of $3.9 billion and 1,550 employees translate to $2.5 million per employee.
I mention these valuations per employee as a way to compare companies. At first glance, they seem high. But consider that the comparable figures for Apple, Microsoft and Intel are $7.6 million, $3.5 million and $1.6 million, and they don't look bad at all!
Going forward, I believe all six of these solar power leaders are capable of great performance, as long as management continues to make the right moves. But there are risks. In the short-term, there's the risk that upcoming earnings announcements will disappoint. Longer-term, their high valuations mean that any market contraction could see these stocks give up of 30, 40 or 50%. And the Chinese stocks are certainly vulnerable to the whims of heavy-handed Chinese leaders.
Nevertheless, just as oil and gas superseded coal, which itself superseded wood, these companies are the odds-on favorites to take market share away from the established energy companies, so growth-minded investors should consider them for serious investment.
While the solar stocks recommended above may appear here again in future emails, there no guarantee of that ... there's so much to write about! But you can get regular updates on First Solar if you take a no-risk trial subscription to Cabot Market Letter (it's Model Portfolio is up 34% this year). To get started simply click this link.
And if you're game for the market's hottest stocks, you can get regular updates on J A Solar and other skyrockets (like Baidu, DryShips and Hansen Natural) by taking a no-risk trial subscription to Cabot Top Ten Report. To get started simply click this link.
Yours in pursuit of wisdom and wealth,
Cabot Wealth Advisory
P.S. I don't like to wade into the dirty waters of politics here, but today I can't resist. The occasion:
The political bickering going on in the Senate regarding first, MoveOn's "General Petraeus or General Betray Us?" ad and second, Rush Limbaugh's characterization of troops who speak out against the Iraq war as "phony soldiers."
I'm no fan of either Limbaugh or MoveOn, but I'm a big fan of free speech, and I don't think it's in the job description of these public servants to publicly criticize citizens who exercise that right. Isn't there anybody in that formerly august body who can stand up and say so?