Usually, when a stock has jumped around fifty percent in five months and twenty percent in just the last week or so, I am looking to sell. The market tends to overdo moves like that and it is reasonable to assume at that point that you have missed most of the move up, so playing the retracement is the only logical thing to do. That is what I intended when I started to look at Canadian Solar (CSIQ) this week, but when I started to research the stock, I realized that far from being a sell it was a solid buy, even after such a big recent gain.
(Click to enlarge)
The point here is that CSIQ’s move up is not just a move based on trader sentiment or market technicals, it is a readjustment to new information. That came when the company reported Q3 earnings of $1.09 per share, more than double Wall Street’s consensus estimate of $0.48. That is reason enough for a stock to gain, but even more impressive was the way they achieved that.
The stock had been suffering earlier this year, which is no surprise given the company’s extensive ties to China and the Trump administration’s apparent determination to pursue a trade war with that country. That has definitely created a headwind for Canadian Solar, and the President, Chairman and CEO of the company, Xiaohua Qu, acknowledged as much in his opening remarks during the conference call that followed the earnings release. To quote Qu though, “…good companies can manage it…” and the way that they have managed it should be a lesson for others.
They haven’t wasted time and money whining or trying to influence policy, they have simply gone about reducing costs. That is evidenced by the record margins that enabled the big EPS beat, even as revenues missed. Cutting costs and improving margins is not only the best way to deal with the current, hopefully temporary, adversity, it also sets up CSIQ for greater success when the market improves.
Given that rise in the stock you may think that it would now be priced to perfection, but nothing could be further from the truth. It seems that whichever metric you look at, CSIQ is a bargain. The trailing and forward P/Es, for example, are 5.42 and 7.57 respectively. Admittedly the solar industry typically has lower than average multiples but for comparison, First Solar (FSLR) has a forward P/E of 14.69. Add in forecast growth and you get a PEG ratio of 0.14, which indicates significant value. Even if you look at non-earnings-related data, CSIQ looks way too cheap. The current price values the company at less than a quarter of its sales and around 83% of its book value. If any or all these metrics simply return to the mean, CSIQ has room to double from here.
For that to happen, of course, there would have to be a significant thawing in U.S./China relations, but that is not out of the question. We know that Trump views the market as a measure of economic success, that he is not averse to changing his tune when it is expedient to do so, and that some of his close advisors, including Larry Kudlow, are enduring the trade war policy only because they believe it to be a short-term means to an end. Given all of that, is an announcement of an agreement, accompanied by some appropriate spin of course, that far-fetched?
As the stock market has tumbled, CSIQ has been a rare bright spot, and that too suggests that when things turn it will outperform. So, while I am not normally a “buy high, sell higher” advocate, in this case I will make an exception. Canadian Solar may be up twenty percent in a week, but circumstances and data both suggest it has a lot further to climb.
By Martin Tillier By Oilprice.com