Time To Get Back Into Canadian Solar
By Martin Tillier - Mar 13, 2015, 5:21 PM CDT
Longtime, regular readers with the memory of an elephant may remember an article that I wrote in May of last year. That piece suggested that even though solar power stocks had fairly consistently failed to live up to expectations, the ridiculously low valuations at the time made a couple of them worth buying. One of those suggestions was Canadian Solar (CSIQ).
In that article, as is my wont, I also suggested parameters for the trade; a stop loss just below $20, which was never reached, and a price target of $37, which, as it happens, was actually about 10 percent away from the top and represented a profit of over 50% in just over three months. Most of the time, when a trade idea is that successful the sensible thing to do is to walk away from the stock and never look at it again. In this case, though I will make an exception.
There are two basic reasons for this exception, one fundamental and one technical.
As always, fundamentals come first. Part of the reason for the initial pick was that it seemed that CSIQ was seriously undervalued for a company with good growth prospects. Even my optimistic expectations for growth, however, have since been proven to be way too pessimistic. Over the last year, Canadian Solar have reported revenues that represent an 89% annual growth rate! As is usually the case in this industry, margins have been tight, but growth like that cannot, you would think, be ignored by the market.
You would think that, but you would…
Longtime, regular readers with the memory of an elephant may remember an article that I wrote in May of last year. That piece suggested that even though solar power stocks had fairly consistently failed to live up to expectations, the ridiculously low valuations at the time made a couple of them worth buying. One of those suggestions was Canadian Solar (CSIQ).
In that article, as is my wont, I also suggested parameters for the trade; a stop loss just below $20, which was never reached, and a price target of $37, which, as it happens, was actually about 10 percent away from the top and represented a profit of over 50% in just over three months. Most of the time, when a trade idea is that successful the sensible thing to do is to walk away from the stock and never look at it again. In this case, though I will make an exception.
There are two basic reasons for this exception, one fundamental and one technical.
As always, fundamentals come first. Part of the reason for the initial pick was that it seemed that CSIQ was seriously undervalued for a company with good growth prospects. Even my optimistic expectations for growth, however, have since been proven to be way too pessimistic. Over the last year, Canadian Solar have reported revenues that represent an 89% annual growth rate! As is usually the case in this industry, margins have been tight, but growth like that cannot, you would think, be ignored by the market.
You would think that, but you would be wrong. A repeat of that growth rate would be extremely unlikely, probably even impossible, but analysts’ expectations for the next twelve months growth average 39%. A P/E of just above 7, giving a PEG ratio of 0.18, means that by conventional metrics the stock is dirt cheap. That is true even when the customarily low P/Es of solar companies and uncertainty about oil prices are taken into consideration.
I happen to believe that oil has found a bottom in the mid-40s, but even if you disagree it can easily be argued that CSIQ’s fortunes are not that closely related to the price of a barrel of oil. Individuals and corporations who invest in solar power generation are not always motivated by current cost. The notion of becoming, or cynics might say appearing, greener is also a powerful motivator, as is insurance against future energy price rises. Growth can therefore continue even if oil fails to recover. CSIQ continues to assert itself as a major, integrated player in the solar energy market, with upstream, mid-stream and downstream projects.
From the technical perspective, the stock at these levels once again sets up for the type of risk controlled trade that appealed last year. The jump up over the last few weeks was launched from just above $28, making that a sensible stop loss level. At the time of writing, CSIQ is available at around $31.80, giving a downside of approximately 12%. The upside, on the other hand, is substantially more. Given the growth record the March high of $41.12 should be reachable if all else remains equal, giving a possible profit of around 30%.
When a company has proved itself capable of sustained growth and the potential reward to a trade is 2.5 times the potential risk it doesn’t take a genius to realize that that is a trade worth taking. That is the case with Canadian Solar, so, despite past success, it may pay to return to the well one more time.
