2011 in Review

The year 2011 was quite eventful and it deserves a brief review.  (And that's not including my personal life events!)  I will focus mainly on the sectors relevant to my portfolio, but I'll also try to address some macro issues as well.

First Solar
Let's get the most difficult one out of the way: First Solar (ticker: FSLR).  This was one of my favorite stocks,  but sadly, it wiped out all of my gains for 2011 and then some.  Let's not mince words here... I was dead wrong!  It was not so much wrong judgment of the company's relative performance to its peers as the wrong judgment on the company's ability to avert catastrophe under unfavorable macro conditions.  My overall assessment of the company still stands; it will weather the consolidation of the solar sector and then go on to become a great company again.  However, I was terribly off in my valuation of the company.

Let's look at the lessons learned here.   First, I ignored the many warnings of a supply glut of solar panels.  I believed that because First Solar led the cost per watt metric by miles, that it would be able to maintain high revenue growth along with high margins.  I was proven wrong here.  The Chinese manufacturers were able to dump panels at very, very low prices, causing the sector to essentially implode.  Although First Solar was able to achieve gross margins in the high 30s, its revenue decreased. Earnings significantly missed the mark.

This leads to the second mistake: I trusted management too much.  It had maintained that earnings for 2011 would be around $9 all the way up until October. Then the board kicked the CEO out and revised earnings to around $6.  And this was two quarters gone already.  How do you miss by 33% and not let shareholders know until it was too late?  The CEO had too little skin in the game (i.e. did not own enough shares), and I ignored that too.

Third, I doubled down without double checking.  Phil Town advises us to stockpile a stock if its share price drops significantly, but we would need to know the business is still intact.  I missed the second part.  Again, circle back to mistake 1. I didn't do enough homework.   I should have proven to myself that First Solar could survive a major sector consolidation unscathed.  By stockpiling, I amplified my losses.  The stock saw an impressive 70% drop off its peak!  Luckily, my other stocks performed well and offset some of it.  Perhaps I need to look at limiting any one stock to a certain proportion of my portfolio to prevent such losses from occurring again.

Will I invest in First Solar again?  That is a definite possibility.  I sold all of my position at $37 when they announced the big restructuring.  The stock dipped to near $30 and has rebounded very nicely to $49.  I guess I should have held on a little longer.  But who knew where the stock would have ended up!  The founder is now back at the company's helm and has a viable business plan.  He knows that solar panels are commodity items and is steering the company into value-added services which allows it to charge a premium for its services and panels.  Its focus on large scale projects in emerging markets is also encouraging.  The company, however, will be going through some tough times as it's 2012 forecast numbers aren't great.  I'm staying clear until there is a compelling case for a rebound in revenue and earnings growth.

Google
The stock (ticker: GOOG) in 2011 went for a rollercoaster ride and basically ended up the same place as it had started.  That's not to say the company and its business has done the same.

First, Larry Page, the co-founder is now CEO of the company.  Android is now the most popular smartphone platform on the planet. Google is in the process of buying out Motorola.  Google+ was released and is slowly building steam.  Chrome is now the second most popular browser after Internet Explorer, surpassing Firefox.  Its bread and butter, search, is still gaining market share.  Most importantly, its revenues and earnings continue to grow steadily.

Q4 was a little bit of a hiccup.  Revenue growth was really good, but their cost of revenues and operating expenses grew a little more quickly.  Thus, their earnings were impacted and grew "only" 10% YOY.  Given the number of new initiatives Google has on its plate, I think this is acceptable.  We'll need to keep a close eye on this.

I still like Google's story...it's not going anywhere any time soon!

True Religion 
True Religion (ticker: TRLG) is another of my darling stocks.  It just released its Q4 numbers and the street was not impressed with afterhours trading.  It was down as much as 25% afterhours.  Do note that the stock has appreciated from low 30s to mid to high 30s as it came closer to earnings.

The story remains the same for the company.  Consumer direct segment (i.e. their own stores + online sales) grew significantly, while the US Wholesale segment continued to shrink.  As a result, gross margins continued to rise to 64.1%.  However, the operating margin decreased from 23.6% last year to 20.7% this quarter.  The increase in SG&A costs in domestic and international expansion.  Same store sales were up 11%.

I'm going to take this as a buying opportunity.  My rationale is this: 1) Consumer Direct is killing it and the North American market is far from being saturated, 2) gross margins are super high and rising - this indicates consumers wants their products and are willing to pay the price, and 3) same store sales are increasing - translating into better brand recognition (e.g. they are not just increasing revenues by opening more stores).  We went through a little of this in mid 2011.  The business is intact and I'm going to put my money where my mouth is.  Tomorrow, I'm going to stockpile some more of this baby!

Synaptics
Synaptics (ticker: SYNA) makes touchscreens for phones/tablets and touchpads for laptops.  The stock has been on fire recently.  I got in in the mid $20s and now it's ~$38!  They have shifted their product mix for touchscreens and that has increased margins and profitability.  With the secular growth in the mobile space, I believe Synaptics will continue to do well.  With P/E ratio of 23 right now, I may just take some money off the table and wait for a dip before getting in again.

US Economy
I believe the US economy is in for a great year.  2011 was a little bit of a drag, but I think that was largely due to the Japanese Tsunami.  It disrupted global economic activity and we saw the US jobs market take a little bit of a breather from its growth in mid 2011.  Below is a graph of the US unemployment rate of the last 60 years (courtesy of Google Public Data).  See how every peak of unemployment is followed by a sharp drop back to more reasonable values?  I believe we will see the same sharp drop starting this year.  Already, we're down to 8.3% unemployment (and don't believe the pundits when they say the unemployment is down all because people are no longer looking for work...look at the stats yourself...I have).

Europe will continue to struggle with its debt crisis.  I don't know what's going to happen in Asia, but I think the US will be the shining star in 2012.  Hey, I'm no economist, but there are certainly good things happening in the States.

Conclusion
While I did quite horribly in 2011, I'm hopeful for a better 2012.  How did you do in 2011?  Leave me a comment!

The Death of (First) Solar?

It's been a dark month for solar...One of my favourite stock just lost a good chunk of its value.  Is this a sign of things to come?  Will solar energy slowly fizzle out?

Let's do a quick re-cap of the happenings in the industry.  With a couple weeks of each other, two US solar panel manufacturers, Evergreen Solar and Solyndra, filed for chapter 11 bankruptcy protection.  The political fallout that ensued included the US Congress putting extreme pressure on the Department of Energy for its $500+ loans to Solyndra.  This puts the loan guarantees that First Solar was looking for in jeopardy.  Word on the street is that it will not get one of the three loans that it was seeking from the DOE.

So, what does the future hold for First Solar?  Or solar in general?  Surprisingly, it is good!  Here are a few reasons.

Traditionally, Europe has been the biggest solar market, with Germany and Italy being top dogs.  With the Eurozone debt problems, they will soon be replaced by the following markets: US, China, and India.  Just look at the comparison.  You have Germany, Italy, Spain, etc....then compare them to US, China, and India.  Even just one of the three nations mentioned can overshadow the entire European market.

Back to First Solar.  So, what happens if it doesn't get the loans from the DOE?  Well, how do other companies get financing?  They sell bonds.  That is exactly what First Solar will do.  True, the cost of borrowing will rise, but the impact is likely just slightly reduced earnings.  At its current price of $73.52, by the end of Q4, the P/E ratio would be 8.0 with the current analysts' estimate of $9.13/share earnings estimate.  Even if FSLR misses by a full dollar, the P/E would a mere 9.0.  The current stock price is absolutely unjustifiable.  By the way, I bought some more shares at $82.50, and will continue to do so.

Going back to Evergreen and Solyndra.  Do take note that the cost per watt of these two companies are greater than $2/watt and $3/watt, respectively.  First Solar is closer to $0.70/watt.  Now, you see why the former two companies went bankrupt.  I have already written about the impending consolidation in the solar industry, with a prediction of Evergreen going belly up coming true *patting myself on the back*!  Look at the days of the automobile.  In the early days of the 20th century, there were hundreds of auto makers in the US.  By the end of the Great Depression, only three survived.  The ensuing years became a time of boom for the Big Three.  I believe that solar energy will be similar.  There are many players now, but we are beginning to see a phase of consolidation.  A few will remain after the dust settles.  My bet is with First Solar.

Do I believe the market is being irrational?  I believe so.  I think the downside risk of buying First Solar now is very minimal.  It was much riskier to have bought the stock at $120, but I still did, because I believed its business was intact.  So, at $73, are you kidding me?  If I were any less responsible, I'd be taking a large chunk of money out of my home equity line of credit!

But, of course, I have to be extra responsible now because our second child, Athanasius, was born just last month, on August 17!  I hope this was a good enough excuse to have put a pause on my blogging!  There's a lot I need to write about, including rolling out an update to my Rule #1 spreadsheet.  I'll do my best to squeeze in some writing time!

Update September 22, 2011 - You would have thought that this guy plagiarized my post!  Great minds think alike! :)

FaithShares Catholic Values: The Only Catholic ETF Out There

So you've read my series on the US Conference of Catholic Bishops' investment guidelines and figured you are just a little too lazy to go through all of that research.  Or you've done all the research and made your picks (good for you!), but you wanted to hedge your bets and buy something that performs a little more like the market.  Well, do I have something for you!  It is the only Catholic ETF out there: the FaithShares Catholic Values ETF (Ticker: FCV).

First of all, if you don't know what an ETF is, the acronym stands for "Exchange Traded Fund".  What that means is it is like a mutual fund where it's run by a fund manager and has many different holdings, but it trades like a stock, where you can buy and sell it within fractions of a second on the open market.  There are also no sales loads, redemption fees, exchange fees, etc.  In other words, it's got all of the advantages of a mutual fund, but not many of the disadvantages.  It does have management fees, however, but really, what funds don't?

I did not feel like boring myself with reading its prospectus (you should if you're thinking about buying it), but I did take a peek at its fact sheet.  From there, I found out what their strategy is.  They take the 400 largest US stocks and apply a screen of them based on the USCCB investment guidelines.  This filters out a number of companies that violate the guidelines.  They then rank the remaining "good" companies based on the same USCCB guidelines.  Once they have a ranking, they take those stocks, and perform sector allocation so that the fund matches the MSCI USA Index, which, for all intents and purposes is equivalent to the S&P500 index.  In short, the FCV mimics the market but invests only in companies which have been screened for Catholic values.

Figure 1: FCV's Performance (Blue) Compared to That of S&P500

Looking at Figure 1, it appears FCV mimics the S&P500 index pretty well.  If you're looking for market returns but want to adhere to Catholic values, this ETF is for you!

I also looked at its top holdings and was quite happy to see 2 of my 4 holdings, Google (Ticker: GOOG) and First Solar (Ticker: FSLR).  My other two, Synaptics (Ticker: SYNA) and True Religion (Ticker: TRLG) were too small to even make it on the radar for the fund to consider.  I had written earlier that I was concerned by Google's leanings to the political left.  I had eventually worked that out and concluded that it was likely ethically acceptable to invest in Google.  I'm glad I've gotten confirmation here.  I will sleep well tonight!

Another thing to mention is that FaithShares donate 10% of the fund's net income to a Catholic charity/organization.  This is excellent!

Overall, I think this ETF is not a bad investment vehicle for those who are lazy, but ethically conscious, or for those who want to hedge their bets.  Do be aware that someone is making an investment decision on behalf of you, and he/she may be wrong!  Factor that into your investment decision.  Lastly, if you're not Catholic, FaithShares does have other Christian oriented ETFs as well.  Do check them out!

Some Recent Changes in My Portfolio

Finally got some time to update my trading history page.  Bought some Google and First Solar since end of April.

Google
Is there any indication that Google's business is declining?  There's one answer to that question: No.  The main reason is that the Internet is still growing.  According to Internet World Stats, the Internet's penetration of the world is still only at around 30%.  That's a long way to go to get to probably around 85%, where I think saturation will take place.

What's more important is that the Internet is reshaping the way the world operates.  Not only will the number of users increase over time, the amount of money to be made on the Internet will continue to grow.  For example, online video streaming is only in its infancy.  Think Netflix and Youtube.  They have been around for less than 10 years, and Blockbuster has become the first casualty.  I have no doubt that cable TV as it is will disappear in about 20 years.  People will still need to be entertained, but likely through some form of Internet service.  This is the megatrend of the 21st century, ladies and gentlemen.  By owning Google, you will be able to participate in this mega-growth!

First Solar
Renewable energy, another megatrend in the making.  First Solar is the lowest cost solar panel maker, and also one of the largest in the world.  Lots of profits and lots of cash, what more can you ask?  Thanks to the Japanese Tsunami, nuclear has lost its popularity as an alternative to fossil fuel power generation.  There will always be naysayers, but solar energy has already reached critical mass.  Again, own this company and you will ride the wave.

Do You Have the Guts?
Half of the battle is finding the courage to buy the right stock.  Anyone can feel good buying a stock that has just gone up 50%.  But those who make money are the ones who have the guts to buy a stock after it has gone down 50%.  Of course, you need to know that it's a good stock in the first place.  Warren Buffet opens his wallet most often during times of calamity, when stock prices are driven down.  You should learn to do the same.  In order to have the guts, you need to have the conviction that your picks are good.  Rule #1 Investing can help you do that.  Start your journey here.

I Bought Some First Solar (FSLR) Today! Part 2

This is going to be a reoccurring theme...buying First Solar on the cheap.  As I try to stick to my stock allocation strategy, I can't help but keep wanting to buy more of First Solar.  This stock is now 33% off from its 52-week high of $175.  If you buy now and it rises back up to that point, you get a nice 48% gain.  So, I decided to buy more today.

Why am I so confident in the stock?  Here's why.  First Solar reported its Q1 earnings on May 3, 2011.  That is more than 4 months into the FY11.  It reiterated its earnings per share guidance for the year of $9.25 to $9.75.  First Solar has a pretty good record for beating analyst estimates, which don't deviate too much from the issued guidance.  So, chances are First Solar will earn at least $9.25/share.  At $118, this works out to be a forward P/E of 12.8, which is a very, very modest P/E ratio, considering it has been sitting near 20 for the past couple of years.

What if they miss estimates?  How bad could they be?  Let's say they miss by a full $1.25.  That gives $8.00/share, which results in a P/E of 14.75, still below the current P/E of 17.  I would say there's quite a bit of margin of safety here.  Since the year is back-end loaded, I can somewhat foresee that the stock price will rise in the second half as Q2 and Q3 results are announced.

Moreover, I believe First Solar may actually beat the estimates.  It earned $1.33/share in Q1, which beat estimates by $0.17/share.  That is not really the important part.  The important part is that they achieved this despite some difficulty.  Their CFO, Mark Widmar, explained in the Q1 earnings call that "net sales for the first quarter were $567.3 million, down $42.5 million or 7% compared to the fourth quarter of 2010. The decrease was primarily driven by lower volumes as we allocated modules to system builds to meet contracted delivery schedules. Revenue recognition is expected for those volumes later in the year."  What this means is that they had produced a number of panels, but they went to the system builds (large scale projects), where the customer doesn't pay until a certain milestone is achieved in the project.  The product is out the door; they're simply waiting for the money to come rolling in.

First Solar also benefits from the fact that they are a systems builder.  So, instead of just selling panels, they actually build solar farms using their own panels and sell the farms to operators.  An analogy that can be used is this.  There are 2 miners who operate gold mines.  Miner A mines the gold and simply sell the gold bars at whatever price gold happens to be.  He makes money, but margins are low.  Miner B also mines gold, but he also has a jewellery wholesale operation.  He signs contracts with Tiffany and the like at the beginning of the year and produces fine gold jewellery for them using the gold they have mined.  Miner B is at an advantage because he is no longer selling a commodity.  You can't go on the open market and buy a designer necklace at the current necklace price.  There is no current necklace price for a designer necklace.  Miner B is able to differentiate itself from competitors.  He also has good visibility of what's coming down the pipeline.  He already knows what the contracts call for and the prices at which the goods are sold.  Therefore, First Solar's forecast carries more weight than pure panel makers.  Pure panel makers make forecasts based on how many panels they can produce and a guess of what the average selling price (ASP) would be.  If the ASP falls dramatically over the course of the year, the forecast would no longer be correct.

That said, First Solar is likely not immune to falling ASPs.  If customers see a dramatic drop in ASPs, they may want to re-negotiate the price of the system.  Customers typically aren't stupid either.  This risk, however, is smaller than the risks that pure panel makers face.

Am I nervous about the dramatic decline in stock value of First Solar?  Sure!  Am I hopeful that it'll bounce back?  Absolutely!  In the game of stocks, we need to take out emotions, which often drive us to do irrational things.  Let's try to keep our heads clear.  In 12 months time, when First Solar is trading at $200, we would likely ask ourselves, why didn't we buy more when the stock was at $120?

Good Bargains Available!

There are currently some good bargains available.  First, we have First Solar (Ticker: FSLR) which is getting hammered for no apparent reason, aside from just pessimism and bearishness.  Google (Ticker: GOOG) is also seeing the $510s, also for no apparent reason.  Fundamentals for both companies look great.  Since I have already bought both of these companies recently, I will be holding out some more.

If FSLR drops below $105, I will start to buy aggressively.  Same with GOOG if it nears $500.  If you don't currently have either of these stocks, you may want to begin thinking about buying some.

USCCB Socially Responsible Investment Guidelines - Part 6: Protecting the Environment

The fifth area covered by the investment policies of the USCCB is "Protecting the Environment".

This is one of my favourite categories.  I moved to Canada from Hong Kong when I was 8 years old in 1987.  Just shortly after I had arrived, Toronto started the curb side recycling program.  Initially, it was only a small "blue box" program where you had about 3 cubic feet of space to place your recyclables each week.  The idea that your garbage was really not garbage was really revolutionary.  There was also a big push in education in the schools.  Over the years, the recycling program had really expanded.  Currently, in Toronto, there are now 3 types of boxes for recycling.  The blue box still exists, but is now a big wheel barrel.  Items such as aluminum cans, glass, and Tetrapaks go here.  There is also a grey box which take paper products.  Similarly, it is a big wheel barrel.  Most recently, a green bin program was started.  Compostable material such as food scraps go here.  These items are all picked up weekly by the curb.  The goal of the city is to divert 70% of garbage from landfills.  A large majority of Canadian cities run similar programs and I would say they have been largely successful.

The same cannot be said for our friends in the US.  I work with many customers from the US and from the anecdotal evidence I have gathered, curb side recycling is still an exception rather than the norm.  I'm not here trying to trash my American friends, but the point I want to make is that the protection of the environment cannot be achieved, at least efficiently, unless there is governmental and corporate support.  This is where our investment comes into play.  We should be using our investment as our voice.

The USCCB's policy for their own investment is to actively promote and support shareholder resolutions that encourage corporations to act responsibly.  Just recently, I had exercised my shareholder right and obligation and voted, by proxy, on the various matters to be discussed at the annual shareholders meetings.  However, what I found was that most of the questions on which I voted were very broad.  They usually revolved around executive pay, use of certain accounting firms, and other shareholder resolutions.  Therefore, I have concluded that it would be difficult as an individual investor to voice peripheral concerns such as the protection of the environment, unless the company's business was directly linked to it.

How to Invest to Protect the Environment

As a result, our obligation is really to select companies that are already environmentally conscious, or better yet, have products or promote technologies that protect the environment.  We should also avoid in investing in companies that harm the environment, whether through their manufacturing processes and business practices or by the use of their products.

I will use my own portfolio as an example.  First and most obvious is my investment in First Solar (Ticker: FSLR).  It makes solar panels which produce electrical energy with no byproducts.  The only impact to the environment would be the manufacturing process and also the panels' disposal at the end of life.  One solar panel produces in the vicinity of 4000 kWh in its lifetime, which is equivalent to 14400 MJ, or 413 L worth of gasoline.  I hardly think one would need to burn a fifth of 413 L of gasoline to produce 1 solar panel!  Solar energy, is without a doubt, green energy.  First Solar is not without some problems.  It uses cadmium telluride in its panels.  Elemental cadmium and cadmium telluride in its own form are toxic to humans.  It is important that First Solar is able to recycle these panels at the end of their lives.

The second and less obvious green investment I have is Google (Ticker: GOOG).  To many people's surprise, Google is actually a very green company.  It invests heavily in solar and wind energy, for example.  It also uses goats to "mow" their lawn, instead of traditional lawn mowers.  There are many good things that Google is doing with regards to helping the environment.

On the flip side, we want to avoid investing in companies that do the environment harm in one way or another.  One obvious example is oil companies like Exxon Mobil (Ticker: XOM) and British Petroleum (Ticker: BP).  BP has become the poster child for companies to hate, with its recent oil spill in the Gulf of Mexico.  Aside from oil spills, the burning of fossil fuels derived from crude oil releases huge amounts of carbon dioxide and other pollutants.  Fossil fuels, in and of themselves, are not evil, but in today's world, humans rely so heavily on them that there may be irreparable damage done to the environment if we continue to consume them at the current rate.  Our insatiable thirst for crude oil is simply not sustainable.  We should direct our investment elsewhere.

Conclusion

It is really not that difficult to evaluate whether a company is environmentally friendly or not.  Just look at its products and how it is made and used.  If you find that it's not that easy to evaluate, try multiplying its current volumes by 10 or 100.  That may make things more obvious.  Or, you can try googling the company name with "environment" and see what results come up.  The internet is really a great place to do research in this area.  In the end, using common sense is likely all you need to do.

I Bought Some First Solar (FSLR) Today!

Good day!  First Solar (Ticker: FSLR) seems to be finding a nice support around the $120-125 area.  I bought some more shares today as I continue to take this as a great buying opportunity.  I also recently started a naked put option on First Solar.  See my trade history.

So what happens if it continues to fall?  I'm buying more!  Overall, Q1 has not been a nice quarter to a number of solar companies.  Evergreen Solar (Ticker: ESLR) is on the brink of bankruptcy.  So, the fallout is beginning! This is a good thing!  Why?  As I have said before, the smaller players will die out, leaving the field for a handful of larger players, such as First Solar.  We know the solar sector will flourish in the current and next decade.  Having stake in the best company in the industry will help you ride the wave.

Also of note, Sunpower (Ticker: SPWR) is being bought out by Total.  This means well for the industry in general.  If an oil company is investing in clean energy, you know it's got a future!  Who knows, maybe some other company like Exxon or BP would be interested in First Solar?  A takeover will send shares very high!

Quick Comparison: First Solar (FSLR) vs. JA Solar (JASO)

JA Solar (Ticker: JASO) impressed investors today with its earnings report and its stock was given a nice 6% jump.  I was a little less impressed.  Here's why.  I am a big fan of huge gross and profit margins.  Why?  Large margins indicate one thing: a huge moat!  People are willing to pay a premium for the product relative to the cost of the product.  Ok, so you say, what's the big deal about profit margins anyway?  A company can still make money and grow revenues/profits even with low margins.  Yes, that is true, but the safety factor for companies with small margins is small.  Let's do a quick comparison.

First Solar 2011 Q1 Results
Revenue: $567 million
Gross Profit: $260 million
Gross Margin: 45.9%
Operating Margin: 20.4%

JA Solar 2011 Q1 Results

Revenue: $556 million

Gross Profit: $96.3 million

Gross Margin: 17.3%

Operating Margin: 15.0%

You can see that both companies made about the same amount of revenue, but the gross profit of First solar was more than double that of JA Solar.  This essentially means that the selling price of JA Solar's products were just a bit above that of its cost.  The one big risk that everyone talks about in the solar industry is falling average selling prices (ASPs).  It means that because many companies are ramping up production, the supply of solar cells/panels will exceed the demand.  As a result, the price of the cells/panels drop.  Because First Solar has a large gross margin, it is more insulated from dropping prices.  If ASPs dropped by 15%, you can bet JA Solar will be losing money.  First Solar may still be able to make money, but just less.

It is a little unfair to do this comparison, however, because First Solar makes panels and JA Solar makes cells.  Solar cells are essentially commodities and are typically a low margin business.  I guess this makes my point even stronger.  First Solar has proprietary technology that lowers its cost significantly.  However we spin it, First Solar's business is superior to that of JA Solar's.

Another interesting point...JA Solar has a very, very low SG&A component, about 2.3% of revenues (gross margin minus operating margin).  The company used only $12.8 million for sales, general, and admin expenses in the quarter, which is suspiciously low.  I'm wondering if there are any accounting tricks that were used.  You can compare this with First Solar's $145 million.  While this is high, it seems much more reasonable.

All in all, it is no surprise that JA Solar's P/E ratio is at a low 4.0.  Investors know this is a risky play.

Volatile Stock: First Solar (FSLR)

First Solar reported earnings earlier this week.  They beat estimates by about 15%, but investors weren't pleased with the outlook, which was the same as their guidance last quarter.  Talk about illogical!  Mr. Market is having big mood swings.  It was less than 3 months ago that the stock hit $175.  Now, it's $128.  This, ladies and gentlemen, is volatility for you!

Take a look at their earnings press release and also earnings call transcript.  I got a sense that Q2 will be another tough quarter, but sailing should be smoother in the second half.  Be prepared for a bumpy ride for the next few months.  On the bright side, some positive outlook they've given include 3.0 GW capacity by end of 2012 and cost per watt down in the $0.52 to $0.63 range by 2014.  This means their capacity would be doubled of what it is today in about 18 months.  In the meantime, I am planning on selling a naked put and maybe also buying some shares (both are bullish positions).

A Flurry of Activity

For those of you who don't know, I publish all of my trades on this page.  I don't show the number of shares, but I do show the price at which I bought/sold.  Recently, I've been busy buying and selling and my broker is loving it.  I've bought shares of Google (GOOG), First Solar (FSLR), Synaptics (SYNA), and sold some True Religion (TRLG) and Garmin (GRMN).  On the options side, I've sold uncovered puts for TRLG and SYNA, as I'm bullish on the stocks and wouldn't mind owning some more shares even if they got exercised.  As well, I sold some covered calls on TRLG, because I felt that the recent run up could lose some steam.  I could be wrong and the shares could be called away, but only after a 28% gain!  Either case, I'm a happy man!

I still haven't written about my case for Synaptics, but I hope to do it sometime within the next 2 weeks.  It just had a pretty impressive quarter and I'm hyped about this company.

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.

Conclusion

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!

First Solar Upgraded by Goldman Sachs, Resulting in a Nice Jump!

Today, First Solar got upgraded by Goldman Sachs.  If you've been keeping up with my posts on First Solar, you'll know that my feeling towards the stock has been essentially reiterated by Goldman.  I quote, "First Solar is our top pick based on one of our key themes for solar stocks in 2011: owning long-term structural winners that are low-cost, well-funded producers with visible demand and credible capacity growth."

Since Goldman Sachs is such a powerhouse in the financial world, this resulted in a nice 6% jump in the stock.  If you look at the chart below, you can see that the stock has broken the $152 resistance, and with conviction (large volume)!  The upcoming weeks will be crucial in seeing how well the stock holds above the resistance level.  If you start to see the $152 mark turn into a support (i.e. when the stock drops, it swiftly bounces back up from this level), then it is likely the stock will go significantly higher.  Of course, this is based on technical analysis...but the fundamentals are there to justify the nice jump upwards.

Figure 1: First Solar (FSLR) 1-Year Chart

I have to confess that I haven't updated my Rule #1 spreadsheet for First Solar lately, but from keeping abreast with earnings, etc., I'm pretty sure it's still below sticker price...probably way below.  Maybe you can run an analysis and see if you should own this "wonderful" company!

Rule #1 Analysis Blitz #6: First Solar (FSLR)

I'm back!  After being sick for several weeks, I am now pretty much fully recovered.  It appears that the flu virus is especially strong this year.  I know a couple of people who took about 2-3 weeks to recover.  It really teaches one not to take a good healthy body for granted!

Up until now, I have analyzed both good and not-so-good companies in my Rule #1 Analysis Blitz.  What I have not included were stocks that I actually owned.  Obviously, I try to follow my own rules and buy only stocks that pass my own requirements.  So, first up, First Solar, my favourite solar panel manufacturer.  I've talked about this stock before, but never really showed you my analysis.  So, here it is, my Rule #1 analysis on First Solar (FSLR).

Before I begin, a useless random fact...the panels in the image I used above are not First Solar panels.  How do I know?  The give-away is in the texture of the solar cells.  You can see small dots of brighter reflection, which indicate that these cells are made from polysilicon.  As you'll soon find out, one of the reasons First Solar is doing so well is precisely because it doesn't use silicon to make its solar panels.

Some Background on Solar Panel Technology

Solar photovoltaics have been around for many decades now.  First, what are they?  They are solar cells that convert light into electricity, just like those found on your handheld calculator.  I can't remember when solar cells began to power them, but they were definitely around when I was a kid in the 80s.  Although solar photovoltaics have been around for a long time, their cost have been prohibitively high to be used to generate electricity on a large scale...until now!

There are 2 major types of photovoltaic cells: traditional crystalline silicon and thin-film.  The majority of solar panels produced today uses the traditional silicon technology.  Manufacturers take silicon, melt it down, and form a large silicon rod, called an ingot.  The ingot is then sawed into thin pieces of silicon wafers.  The wafers are fractions of a millimeter thick.  So, if you imagine that you had to cut a loaf of bread into very thin wafers, you will waste a lot of bread because you knife is thick and you'd cut off a lot of crumbs.  This is effectively what happens when the sawing occurs.  These thin wafers are also very fragile and often break during the subsequent processes that includes soldering wires onto them, laminating them between two pieces of glass, etc.

The thin-film technology is a much more streamlined process.  Instead of forming a large ingot and then cutting it into thin pieces, a large glass panel is the starting point and the semiconductor compounds are deposited onto the glass using vapour deposition.  The layer of semiconductor is less than 0.050 mm thick, compared to a silicon wafer of about 0.200 mm thick.  This technique also wastes very little of the semiconductor, unlike the sawing process for silicon wafers.  In short, the thin-film technology is significantly cheaper than the tradition silicon process.  One downside is that the efficiency of the cells, how much sunlight gets converted into electricity, is lower.

First Solar is arguably the most successful thin-film solar manufacturer in the world.  Applied Materials, which began selling thin-film "factories in a box", a few years ago have effectively ended their solar business.  The largest solar players out there now, Q-Cells, Suntech (Ticker: STP), Trina Solar (Ticker: TSL) all use traditional silicon technology.  Sharp Solar is pretty much the only thin-film manufacturer out there that is comparable to First Solar.  First Solar is the lowest cost manufacturer in the world at $0.77 per watt.

Moat

You can download the completed Rule #1 spreadsheet here.

Before we begin, we should note that First Solar is a relatively new company.  It was founded in 1999 and became a public company in late 2006.  In normal instances, Rule #1 investors look for companies with a longer history that is consistent.  However, I made an exception just because I think First Solar is a great company.  Let's take a look why that is the case.

The first few years of the companies are really irrelevant, in our case.  It was a startup and management was just trying to figure out things like developing its product and build factories.  It was a time of expansion and rapid consumption of capital.  So, let's take a look at its more recent history

The Big 5 numbers in the summary table is not of much value this time, because the longer term numbers are fairly inconsistent.  I've added a second figure with sales, EPS, BVPS and free cash flow numbers of the past 10 years.  Just taking a glance of these numbers for the past 4 years, you can see that there is explosive and consistent growth in pretty much every category.  The only concern is that free cash flow has been a little inconsistent.  However, there is a good explanation for that.  If you look at cash from operations, the growth has been very steady.  The only thing that is hurting free cash flow is capital expenditures, which is essentially the cost to increase production capacity or building new production lines.  That is expected of a company that has expanded production to more than 1 GW of solar panels sold in 2009.

The moat that First Solar has is in its cost structure.  Because of its successful thin-film technology, cost per watt has gone below $1.00 per watt, which has not been achieved by any other solar manufacturer.  And this was achieved by First Solar back in 2009!  Other Chinese manufacturers are gettting close to this $1/W milestone, which is thought by many as the grid-parity value (i.e. the cost of panels to make cost of solar energy to be the same as traditional energy generation methods).  This is very important because solar panels are essentially commodity items.  Like potatoes or oranges, customers don't really look for brands of these products and their buying decision is largely based on the cost of these items.  If you look at Walmart, the world's largest retailer, it sells commodity-like items but at a cheaper price than most other competitors.  Its cost moat is the reason why they have been so successful.

The demand of solar products is currently so high that other less efficient manufacturers can still sell their products at a profit.  As solar supply increases, the selling price of panels will decrease.  Inefficient manufacturers will either need to decrease margins and potentially even sell at a loss or risk not selling any panels at all.  There will be a fallout of these companies.  What will eventually happen is that a few larger players will survive during this consolidation of the industry.  First Solar is in a good position going forward.

Because solar panels are commodity items, unless First Solar continues its leadership in low cost manufacturing, it will lose out to other manufacturers.  There is no reason why customers would want to buy First Solar panels if theirs were more expensive.  For this reason, it gets a couple of points docked off for Moat.  It gets an 8 out of 10.

Moat Score: 8 / 10

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

Figure 2: Rule #1 Analysis of First Solar (FSLR) - Continued

Margin of Safety

First Solar has been growing EPS at greater than 50% in the past few years.  For 2010, it will likely slow to about 20%.  There has been a lot of concern about shrinking margins at First Solar, but I believe these fears are overblown.  In any case, I believe EPS growth can probably continue at the analysts' estimates at about 23%.  The historical P/E ratio of 19.4 was used.  These assumptions give us a sticker price of $277 and entry price of $139.  The stock sits at $135 at time of writing.  It looks like we have adequate margin of safety to buy this stock.

Because of its high estimated EPS growth, payback time is a mere 7.2 years.  I'm really liking this!

Since the EPS estimates are fairly high at 23%, I will take a few points off.  First Solar gets a 7 out of 10 in Margin of Safety.

Margin of Safety Score: 7 / 10

Management

Robert J. Gillette is the current CEO of First Solar.  He's only been at the helm for a bit over a year, replacing Michael Ahearn.  Prior to leading First Solar, Gillette was CEO of Honeywell's Aerospace division, which was the largest division in the company.  Gillette has a pretty good track record.  After a year as CEO, Gillette continues to drive growth at First Solar.  He has plans to expand capacity to 2 GW by end of 2011, which is nearly double of what it is in 2010.

Since his tenure at First Solar, Gillette has bought 10,000 shares of First Solar at $104.63.  The stock now sits at $135.  It is usually a good sign when an incoming CEO buys a significant amount of shares.  He is putting his money where his mouth is.  I remember when the CEO of my company, ATS, Anthony Caputo came onboard, he bought a large number of shares.  Since his arrival, our stock has risen from under $4 to about $7.

In a recent conference call, Gillette explained that the company's goal is to seek long term growth, which means that margin contraction would likely occur.  Why is that?  They must price their products accordingly to achieve market penetration.  Many times, companies that are first to market gain a large percent of market share.  Ebay is a perfect example of this in the online auction business.  The riskier and the correct path for the company would be to make investments up front.  As I mentioned above, the industry will go through a consolidation phase as the technology progresses.  That has already begun to happen.  My prediction is that smaller, non-profitable players, like Evergreen Solar (Ticker: ESLR), will go bankrupt within a few years.  As long as earnings continue to grow in absolute terms at First Solar, I believe a little margin contraction is not an issue at all.

I give Gillette an 8 out of 10.

Management Score: 8 / 10

Meaning

First Solar has tremendous meaning to me.  As long as I could remember, I found renewable energy very interesting.  In my highschool days, whenever I had science projects, I would pick topics like fuel cell technology, automotive hybrid technology, etc.  I foresee a future of clean and sustainable energy for the world.  It is only a matter of time before that happens.  Our generation is just like that of 100 years ago.  We are going to see a whole paradigm change.  100 years ago, the automobile changed the lives of everyone on the planet.  100 laters, sustainable energy will be that life-changing technology.

We are also stewards of this Earth.  We are now at a stage where if humanity continues its path of burning fossil fuels, we will destroy not only our environment, but civilization itself.  Investing in renewable energy is one of the more ethical decisions you can make financially.

First Solar has a number of manufacturing plants in Malaysia and Vietnam.  Many people think of sweatshops when Asian factories come to mind, but if you have every visited a photovoltaic manufacturing facility, you would think you have entered a futuristic world.  The working conditions are clean and brightly lit, and operators have to been in good working conditions since product quality is of top concern.  Sweatshops and photovoltaic manufacturing facilities could not be any farther apart in the spectrum of manufacturing plant conditions.

Solar energy will drive the economy in the coming future.  We will see that more and more in North America. Ontario has already begun to adopt the government subsidy programs that have made Germany a solar powerhouse.  By investing in solar energy, you are investing in the well-being of the world economy.

One last point about First Solar is that it uses cadmium, a toxic material, in its solar panels.  Although it provides panel recycling services, there will be instances where customers will be negligent.  I can foresee potential problems caused by the use of cadmium.  Having said that, this problem can largely be controlled.  The benefits of the panels offset the toxic materials in a significant way.

First Solar gets a 9 out of 10 for Meaning.

Meaning Score: 9 / 10

Summary

Moat Score: 8 / 10

Margin of Safety Score: 7 / 10

Management Score: 8 / 10

Meaning Score: 9 / 10

OVERALL (not an average): 8 / 10

The weakest point in First Solar is in margin of safety.  It needs to sustain a high growth rate for our numbers to be justified.  However, I have put my money on First Solar.  The sustainable energy megatrend will help First Solar realize these growth rates and it is not far fetched to believe that First Solar could become the Exxon Mobil of the future.  If First Solar has meaning for you, definitely use this as a starting point of your research.  Good luck!

First Solar Plans on Doubling Capacity

Just read this press release from First Solar...They announced additional expansion plans, which will bring their capacity from 1.4 GW this year to 2.7 GW in 2012.  That's 93% increased capacity in 2 years, or 39% per year.  Even if their margins erode, it's kind of difficult to not increase EPS significantly.

One thing that is important when you see this type of expansion plan is how well the company will execute.  Some times the best laid plans do not go as expected.  However, for First Solar, their past history has been nothing short of spectacular.  The company has been in existence for 11 years, and has become one of the biggest panel makers in the world, while making tons of money in the process.

As I have said before and will say again: renewable energy is the next megatrend.  Don't miss out!

Solar Demand Very Healthy

I'm a big fan of solar energy and I think it's a megatrend in the making.  There are a lot of doubters out there and thus, the whole solar energy sector has taken a beating over the past few months.  Many solar stocks are near their 52-week lows.  There are various reasons for this.  First, Germany is the biggest solar market right now, mainly because its government was an earlier adopter and introduced subsidies early on.  It is now making cutbacks to those subsidies and that has made ripples in the market.  Second, Europe is also the largest solar market out of all of the continents, and we have all heard of the trouble that is brewing in the Eurozone.  So, I don't blame the naysayers entirely.

However, we need to see through this noise.  Look at the megatrend that is forming.  Look at the BP oil spill.  Do you think the world will still want to rely on fossil fuels after this disaster?  Although oil is not directly linked to electricity generation, it is now very apparent that we, as a civilization, can no longer depend on non-renewable energy.  We just had a temperature record breaking spring.  Whether this warm weather is caused by global warming or not, people are starting to associate climate change with usage of non-renewable energy.

I also read two articles that confirm my suspicion, that solar energy is alive and well.  First, First Solar announces that it cannot meet the demand for 2010.  Then, Suntech (Ticker: STP) also makes the same announcement.  These are two of the biggest solar panel makers in the world and if demand is greater than their capacity, then I think overall demand is probably greater than the overall capacity of the total capacity of all solar panel makers.  It's just a hunch, but I'm not afraid to put some money on this hunch.

Anyway, I believe it's a great time to get into solar.  Stock prices are low and upside potential is huge.  Start your research with First Solar (FSLR), Trina Solar (TSL), and Suntech (STP).

Growth Stocks: Are They Safe Investments?

Growth Stocks - A Bad Rep?

In a previous post about fundamental analysis, I talked a little about what I term "reckless investing".  After the dot-com bust in the early 2000s, growth stocks have become somewhat a synonym as "reckless investing".  Why?  In the years leading up to the bust, people believed in the internet revolution, where the internet and e-commerce would change the way of life.  This was a typical "this time is different" mentality.  By the way, if ever you hear someone say, "this time is different," run for your life!  Things will almost always be the same, because human greed (one of the 7 deadly sins) is very, very consistent.  Even renewable energy will eventually turn into a bubble.  Anyway, I digress.  

So, what spawned from the dot-com bust?  People were very afraid of growth stocks...you know, stocks like Google (ticker: GOOG) and Apple (ticker: AAPL)...catch my drift??  So, instead, a lot of people in the US invested in safe investments, like real estate.  As a Chinese-Canadian, I am deeply influenced by my Chinese roots.  One thing that my dad had always advocated was that you can never go wrong buying real estate, because it's something tangible and people always need to live in a home.  Wow...it's a good thing he didn't invest in real estate and live in the Nevada in 2008.  So, fast forward a few years to 2007 and you know something is brewing.  People kept on talking about subprime mortgages...what the heck are those?  I'd like to get a mortgage at rates lower than the prime rate, right?  Sorry, that prime is very different.  Everyone now knows that subprime refers to risky borrowers who are probably going to default if something went bad.  And bad it went!  We all know about that fiasco now after living through what will be termed by historians as the Great Recession.

So, back to growth stocks.  In and of themselves, growth stocks are neither a good nor bad investment.  There are some awesome growth stocks, and there are some very poor growth stocks.  How do you define a growth stock anyway, you ask?  Investopedia gives the definition as, "Shares in a company whose earnings are expected to grow at an above-average rate relative to the market."  I personally like growth stocks because they are typically technology stocks and I'm a geeky guy.  My portfolio is almost entirely made up of growth stocks, and hopefully, I'm not doing some reckless investing!

Can Growth Be Sustained?

Let's take a look at my darling, First Solar (ticker: FSLR).  It's a relatively new company in the solar photovoltaics sector.  It IPOed in 2006 at around $25 and quickly grew 10x in about a year's time.  Holy smokes!  I wish I knew about this company when it IPOed!  As the recession hit, its stock dropped back to double-digits for a while.  Now, it's sitting at around $112 at the time of writing. The question now is: will it become another Nortel (ticker: NT...now non-existent due to bankruptcy)?  There are doubters in the room...I can feel it.  Some, as a result of the dot-com bust, will never put their trust in growth stocks again.

All arguments aside, let's look at a mystery growth stock.  Below, you will see the first 2 years' performance of the stock.  It IPOed at around $0.10 and quickly grew to $0.55 in 2 years - simply spectacular performance.  Then, it hit a bump and dropped back to $0.30.  What is its future?  Is growth sustainable for this company?  Some will argue that the price rose too much, too quickly.  No stock can sustain that type of growth in the long term.  This 45% drop in price is just a signal of things to come.

Ok, this is an investing blog, not a mystery novel.  So, I will save you the suspense.  The stock is Microsoft and the years were 1986-88.  Below is the chart of its entire history.  As we all know, even if you did buy at the "peak" of $0.55 (this price is split-adjusted), you would have made approximately 60x your initial investment if you held and sold in 1999.

What's the moral of the story?  There will be some stocks that will grow, and grow, and grow.  Don't be disheartened if you find a growth stock with a bright future, but is experiencing a pullback.  They may resume their growth in the very near future.  You will need to identify these companies.  For that, see my post on megatrends.  By identifying a megatrend, you can be sure you're in for some awesome returns.

A Tale of Three Stocks

Don't believe me?  Let's take a look at the oil megatrend.  Oil is the single most important energy source of the world today.  To say that it was a megatrend almost does not do it justice.  The stocks of the 3 of the biggest oil companies in the world (Exxon Mobil, British Petroleum, Chevron) are plotted above.  BP has the worst performance, but it matched the growth of S&P 500 in the same time period, which is still fairly good.  Exxon Mobil's growth was simply super.  Investing $10K in 1970 would have resulted in $500K portfolio at the stock's peak.

This again confirms my take on megatrends.  You don't really need to be 100% on your stock selection.  If you can find a megatrend, the successful companies in that industry will benefit, although some more than others.  Of course, finding the best one will give you that extra boost.

Back to First Solar

The funny thing about First Solar is that its stock is getting a beating because...wait for it...the future is uncertain.  What?  When was the future ever certain?  Investors are scared because German feed-in tariffs may be cut, too many solar companies are ramping up, the global recession is still affecting solar projects, yadi, yadi, yada.  Yet, they don't look at the other side of the story.  China is planning on a 2GW solar farm with FSLR as supplier and it is imminent that the US will pass an environmental bill, etc.  Again, when others are fearful, you want to be greedy!

Take a step back and look at the megatrend.  Renewable energy is the future.  There is absolutely no doubt in that.  And you know what the best thing is about that?  It's the fact that by investing in renewable energy, we are fulfilling the stewardship that God has placed on humanity for the care of the Earth.  Investing ethically and making some super returns is one of the best combinations you can get in the world of investing!