Thursday, March 31, 2011

Update of Portfolio: First Solar (FSLR)

Today, I will be talking about the third stock in my portfolio: First Solar (Ticker: FSLR).  First Solar is a company that makes photovoltaic (PV) panels and is also involved with large scale PV project developments.

When a typical Joe hears the words, solar energy, he is likely to think of inefficient and expensive solar panels lined up row after row in a remote desert somewhere.  There is some truth to that, but the technology is starting to gain wide acceptance, especially after the tragic Japanese Tsunami that crippled a number of nuclear plants in Japan.

I like First Solar for a variety of reasons.  It is a "best of breed" stock in many aspects.

  1. Its capacity will be around 1.4 GW in 2011, which will likely be about the 2nd largest in the world.
  2. It has the lowest cost per watt, at about $0.77/W at the end of 2011.  The closest competitor, Yingli (Ticker: YGE), is at about $1.11/W.
  3. It is the only successful thin-film solar manufacturer.
  4. As a result of its low cost structure, it has one of the highest operating margins in the high 20s, which is more than the gross margin of many other solar companies!

Figure 1: Rule #1 Analysis of First Solar (FSLR)

The past 12 months have been good for renewable energy.  First, there was the BP Oil Spill.  Then, the Japanese Tsunami and the subsequent nuclear plant incident.  These are tragic events, but sometimes, humanity requires a shock to our system to really wake up from our dream.  China is now putting on hold new nuclear plant developments.  Tens of thousands of German citizens protested against the use of nuclear energy in the wake of the Japanese Tsunami.  2010/11 will mark the turning point in human history with respect to energy use.

It is true that solar energy will likely not replace the nuclear plants in Japan.  However, as the world awakens to the renewable energy revolution, more and more emphasis will be put on solar (and wind and geothermal). I want to make sure that I ride that wave once it hits (sorry, no pun intended).

There are some skeptics and their arguments are logical, but I will show you why First Solar can withstand even the worst-case scenario.  One of the most cited argument against solar places concerns over an oversupply of solar panels, coupled with decreased government subsidies.  Many solar companies are ramping up their production.  As the argument goes, there will simply be too many panels around and not enough demand.  As a result, the prices of panels will drop.  Companies will lose money and as a result, you will lose money if you're invested in solar.  Decreased government subsidies just aggravate the problem.

Yes, I agree with these skeptics that there will be fallout.  Evergreen Solar (Ticker: ESLR) will be one of the first to go.  The companies without meaningful profit and a lot of debt will all be in trouble.  But I'm not worried, because I've got the best of breed.  First Solar is currently making money hands over fists.  Gross margins are super high at around 50%.  Trina Solar's cost, which is its closest competitor, is about 44% more expensive than First Solar's.  If the average selling prices (ASP) drop significantly, if anyone will continue to make  money, it will be First Solar.  Regardless of how much supply there is in the market, the lowest cost manufacturer will always make money.  Ok, well, not always...but it does not make logical sense that even the lowest cost manufacturer needs to sell at a lost, as long as there is demand for solar panels.

First Solar investors should actually want ASPs to drop significantly.  What will happen is that the high cost manufacturers will start to sell at a lost.  Eventually, they run out of funds and are either bought out or have to close shop.  The supply of panels will drop as a result, leaving only the stronger players.  There will be consolidation in the solar market, but after this consolidation, First Solar will emerge stronger.

Rule #1?
You bet that First Solar is a Rule #1 stock!  Growth has been steady and phenomenal and I believe it will continue to be phenomenal.  Sticker Price/Intrinsic value is at $303, and so the stock is still undervalued.  My average price is $131.60 and the stock closed at around $160 today.  If the stock drops below $150, I may start buying again, but at the current price, I'm in a holding pattern.

This stock is also fairly volatile.  So, if it hits $170-180 in the short term, I may unload some shares and wait for a pullback to buy again.

Should you buy?  It all depends on your appetite for volatility (notice I didn't say "risk").  I believe the stock has relatively low risk for several reasons: its past performance, its current state (which is excellent), and the current price is not too high.  However, the amplitude of price fluctuations is large.  So, if you can stomach seeing your holding drop 20% in a couple of weeks, then this stock may just be for you!

Tuesday, March 29, 2011

I'm a Synaptics Shareholder!

Today I became a Synaptics (Ticker: SYNA) shareholder.  They make touchpad and touchscreen products that are used on PC laptops, smartphones, etc.  Didn't buy a whole lot of shares, but wanted to start a position.  I've got a paper to write for more on this later!  God bless!

Tuesday, March 22, 2011

Update of Portfolio: Google (GOOG)

Next up on my portfolio update is Google (Ticker: GOOG).  Click on the link in the previous sentence to see all of my posts on the company.  I've written not little about this company.  Reading the older posts will give you a flavour of my thoughts.

Where to begin?  How about an amazing 2010 for Google?  If you look at the Rule #1 spreadsheet below, and click on "Big 5" and scroll down to "EPS", you will see the historical earnings for the past 10 years.  The growth is phenomenal!  Aside from year when the world was coming to an end (2008 if you weren't paying attention), the minimum year-over-year EPS growth was 28.9%, which was last year.  Yes, the growth of the company is slowing, but at 28.9%, it's still pretty red hot!

Figure 1: Rule #1 Analysis of Google (GOOG)

Red Hot Growth
Is the growth going to continue?  My answer is: YES!  There are several factors that we can look at.  First, and foremost, the internet has not stopped growing.  How do I know?  Well, let's take a look at a somewhat related technology, the cell phone.  It's been around for about 20-25 years now (at least commercially) and you would think that the technology has pretty much plateaued.  Are you kidding?  Just look at the new smartphones that are coming out every week, and you know there is still tremendous growth.  Now, going back to the's just about the most revolutionizing technology of the 20th and 21st century.  It has changed the way humans do things.  Just think about it: when was the last time you wrote a letter?  When was the last time you opened a phone book to find a phone number?  When was the last time you looked for a job in a newspaper?  And the list goes on.  Is the internet mature now, after being widely available for about 15-20 years?  I hardly think so.  Facebook, the newest internet darling is barely 7 years old!  Who knows what's going to happen in the next 20 years.  But you can bet Google will be part of it.

Second, Google is still supreme in the internet space.  One piece of anedoctal data: Google makes up about 94% of the search engine traffic to this site.  Facebook, while exhibiting tremendous growth, made about $2 billion in revenue last year, while Google made about $8.5 billion in net income, and about $29.3 billion in revenue.  Facebook still has a ways to go to catch up from a business standpoint.  Many speculate that Facebook will dethrone Google, but the two companies don't really even directly compete against each other (save Google's Orkut).  In fact, I believe they complement each other pretty well.

Third, Google has good products and services.  Unlike Microsoft (Ticker: MSFT) but like Apple (Ticker: AAPL), people enjoy using Google's offerings.  Gmail is quick, Google Maps is indispensable, Android is a very compelling alternative to the iPhone, Youtube is synonymous with online videos, and last, but definitely not the very least, the Google search engine is still the very best.

Lastly, Google has vision.  The co-founders Sergei Brin and Larry Page are two of the brightest computer scientists around.  They have the technical know-how to steer the company in the right direction.  The foresaw the emergence of mobile internet a few years ago, bought a small company called Android, and developed it into the smartphone platform that now has the greatest market share in the US.  It could very well have developed a "gPhone", but instead, it made a platform that was free to phone manufacturers.  Consumers like choice.  Some people, like myself, just don't want to own something that everyone already has.  I like to be relatively unique, but don't want to sacrifice on performance either.  Android fills that gap nicely.

Cloud computing is undoubtedly the next progression in computer technology.  Google understands that and is already committed with their Google Docs and upcoming Chrome OS.  If you have not used Google Docs before, it's a cloud-based replacement for Microsoft Office.  Granted, it's nowhere near what MS-Office could do, but for everyday, simple tasks, it fills its shoes quite nicely.  Lately, my wife and I have been contemplating moving to a larger house and we use Google Docs to collaborate and save listings that appeal to us, whether we're looking at the listings from our computers at home, or browsing during our lunch hours (I swear, I never surf the web during work hours!! [just in case my boss reads this] LOL!).

Some Numbers
Looking at the Rule #1 spreadsheet above, the fundamentals look good.  The only thing is that Google is approaching its intrinsic value or sticker price of $673.  However, it has seen a slow, but sure drop to the $550 250-day EMA support lately.  Couple this with a forward P/E of around 14, I thought this was the biggest discount the stock was going to see.  So, I did what felt right: I added to my position.  We'll see what happens next.

My current average cost is $494.  So, I'm making a bit of money.  Analysts have Google making around $34.59 in 2011.  If the P/E ratio is maintained at around 20, the stock price could go up to $700 by the end of the year.

Some Caveats
There are some caveats for sure.  They include i) China and ii) ethics.

As we all know, the Great Firewall of China is even more formidable than the physical wall itself.  China is very paranoid about free speech and the free flow of information.  It requires that search engines present censored search results.  If you don't believe it, go to and search for "tiananmen square massacre".  I got a total of 8 results...8!!! gave me 477,000 results!  Just early last year, Google decided it wasn't going to censor its results anymore.  The Chinese government quickly blocked the site.  Google now runs as its Chinese version of the search engine, because the Hong Kong Special Administrative Area has different laws than the mainland.  However, the government can still block that site from its mainland users at any time.  When everyone is trying to get into China, Google has opted for higher moral ground and has gotten out.  This may not be an permanent situation, but for now, it definitely has not helped its business in China.  Investors have punished Google for this move in 2010.

Google also has some fairly left-wing leanings.  It fully supports the homosexual movement and advocates for them.  I've discussed this issue before.  So, please check it out.  In any case, this is one thing that holds me back from 100% endorsing in the company.  I have weighed the pros and cons in my reflections and have determined that this does not warrant me to pull my investment from Google, but I do keep an eye on any new developments and may change my position to reflect them.  If you do decide to invest in Google, I advise that you do the same.

From the business side of things, there really are no concerns.  Google is in a good position to capitalize on the continued growth of the internet.  It is fully aware of its competition and I'm sure they've got some bright brains behind the curtains working on something.  Unless the business fundamentals show significant deterioration, or the ethical side of things take a really horrible term, my money is still with this company.

Tuesday, March 15, 2011

Aftermath of the Japan Tsunami

The Japan Tsunami was not the event that triggered a sell-off.  Last Friday, the day after the Tsunami hit, was a relatively calm trading day.  What did bring down the markets were concerns over the nuclear power plants.  People are afraid of Chernobyl Japanese style.  Uranium stocks have been  hammered massively, while solar stocks have jumped nicely.

The setback in the Japanese economy will have some effect, but I do think the market is somewhat overreacting to the events.  Keep your eyes peeled for a nice drop in your favourite stocks and pick them up at a nice price after the dust settles.

USCCB Socially Responsible Investment Guidelines - Part 4: Reducing Arms Production

The third area covered by the investment policies of the USCCB is "Reducing Arms Production".

Every country has a right and obligation to defend itself.  This right inevitably leads to the purchase of weapons.  Are weapons in themselves evil?  No.  They are merely tools.  So, why does the Church have this category altogether?  It is not so much concerned about the Church's stance on the morality of weapons, than its stance on the disproportionate amount of money spent on the military.  In 2010, the budget of the US Department of Defense was upwards of $500 billion dollars!  That is larger than the market capitalization of any company in the world!  Imagine dissolving a bit less than 2 Apples (the company) tomorrow, and taking all the shareholder value and putting it into military spending.  That would only last 1 year in the US.  What would happen if only 10% of that budget ($50 billion) was put to improving the lives of the poor?

Canadians are in a better position.  Our military spending is dwarfed by the US military spending, at roughly $20 billion per year.  Still, that is not a small number.  Imagine dissolving Rogers Communications...Let's look a little more closely.

The 2 sub-categories under this area are:
  1. Production and Sale of Weapons
  2. Antipersonnel Landmines

Production and Sale of Weapons
The USCCB's stance on the production or sale of weapons is twofold.  First, it will not invest in any company that derives its revenue primarily from the production of weapons.  Second, it will not invest in any company that develops weapons that is contrary to the Church's teaching on war, that is, weapons of indiscriminate, mass destruction.

A few of the larger defense contractors in the US include Lockheed Martin (Ticker: LMT), Northrop Grumman (Ticker: NOC) and Raytheon (Ticker: RTN).  Government expenditure in each of these companies are in the magnitude of billions of dollars.  Even without doing much research, it is not far fetched to think that these companies are major supplies of weapons or weapons related products.  Typically, you can find out a lot about a company's products in its Yahoo Finance profile page.  That would be a place with which I would start my research.  Just reading the Lockheed Martin profile page was enough to turn me away from that company.

The first was easy to detect; the second, not so much.  Companies that develop weapons of mass destruction would likely not advertise that they're doing such work.  It's best to avoid all companies that develop or manufacture arms.

Antipersonnel Landmines
The use of landmines is similar to weapons of mass destruction.  The device will not care whether a soldier or a 4-year old boy steps on it, it will activate when anyone steps on it.  Indiscriminate landmines have since been banned by the Ottawa Treaty.  They're really just a specialized form of weapons.  So, if you already avoided arms manufacturers, you'd be pretty safe.

Conclusion is simple: avoid defense contractors and avoid weapons manufacturers.  If you do get into aerospace companies, be very vigilant as some are also involved with building fighter jets or components for them.  I'm not saying these are necessarily bad, but you would need to investigate and make a judgment call.  Better to stay away than to be ignorant.

Monday, March 7, 2011

USCCB Socially Responsible Investment Guidelines - Part 3: Promoting Human Dignity

The second area covered by the investment policies of the USCCB is "Promoting Human Dignity".  This follows the first category of "Protecting Human Life".  It is not sufficient for us to protect human life, we must recognize that humanity is made in the image of God, and that we have a special dignity above all other creatures.

The 5 sub-categories under this area are:
  1. Human Rights
  2. Racial Discrimination
  3. Gender Discrimination
  4. Access to Pharmaceuticals
  5. Curbing Pornography
Human Rights
Human rights sounds almost like a no-brainer.  Of course, we need to promote adoption of human rights, correct?  Absolutely!  Everyone has the right to life, religion, freedom of speech, etc.  We should not, for example, invest in a company that uses sweatshops, which denies its employees of their most basic needs.  Most operations in the developed world will be very respectful of human rights.  However, we need to cautious of American companies with operations in developing countries, to ensure that they operate under the same standards as they would in the West.  Examples of these companies that have bad international practices include Walmart (Ticker: WMT) and The Gap (Ticker: GPS).

On the other hand, the issue in the developed world is not so much the violation of human rights, but the protection of "rights" that should not be treated as human rights.  In the past decade or so, the homosexual agenda has made headway in most western countries.  Same-sex marriage is now a reality in Canada and a number of US states.  In Canada, there is now a bill (Bill C-389) going to the Senate right now to add "gender identity" to the Canada Human Rights Act.  Essentially, if this bill is passed, it means that, for example, employers cannot discriminate based on gender identity.  So, if a transvestite comes for an interview for a teacher position at an elementary school, the school board cannot discriminate based on his "gender identity".  These progressions are a deconstruction of the society that Christianity had built in the past 2 millennia.  We should avoid investing in companies that promote this deconstruction.  In my post on Apple (Ticker: AAPL), I talked about how it was rated highly by the Human Right's Campaign, a pro-homosexual group.  This would be a good place to start your research.  Remember, if this group rates a company highly, that's a BAD thing!

Racial Discrimination, Gender Discrimination, and Access to Pharmaceuticals
I am putting racial discrimination, gender discrimination, and access to pharmaceuticals into one group.  Chances are if you dig up some dirt in the human rights category, you will also see issues in these categories as well.  If a company treats that workers like trash and provide horrible and dangerous working conditions, I don't think they would, for example, provide them with excellent access to pharmaceuticals.  These go hand-in-hand.  There's not much else to say, except: don't invest in companies that adopts these reproachable behaviour.

A good way to start your research is googling, "[company name] ethical issues".

Curbing Pornography
Here, I quote the USCCB investment policy regarding pornography, "The USCCB will not invest in a company that derives a significant portion of its revenues from products or services intended exclusively to appeal to a prurient interest in sex or to incite sexual excitement. These would include, but not be limited to, sexually explicit (X-rated) films, videos, publications, and software; topless bars and strip clubs; and sexually oriented telephone and Internet services."

The obvious companies in violation include Playboy (Ticker: PLA).  A less evident company is American Apparel (Ticker: APP).  If you haven't seen their ads before, just google, "American Apparel ads" and select images; you'll understand what I'm saying very quickly.  Although it sells very normal clothing, the advertisements are close to soft-core pornography, and the sad part is they are targeted towards the younger segments of the population.  Although the company probably passes the USCCB test, because it sells morally neutral clothing.  Yet, there is something wrong with investing in a company like such, because it essentially does what all pornography do.  That is, it reduces the subject (the female models in this case) into an object.

Other companies to avoid would be media companies that produce distasteful films, magazines, services, etc. A majority of these companies are smaller-sized, privately owned companies.  So, you may not need to worry so much.  Do keep an eye open though.

In the category of promoting human dignity, there is one question that you need to ask, "Does the company treat human beings as though they were human beings?"  The company should not exploit their employees to increase profits; they should not discriminate; they should not treat or portray people as though they were objects.  Even if their products or services were benign, but the image they portray does any of the above, I would still rather not invest in them.  Of course, it's all a balancing act.  A lot of great companies will indeed violate some of the principles discussed above.  You would need to make a judgment call on your investment decisions.