Solar Technology Stocks

Solar technology stocks have been literally running off the charts. Some are approaching a three-month, 300% run:

And this came at a time when most solar companies were reporting mounting losses for the first quarter.

So what happened? Why are these stocks flying in the opposite direction as common sense? And is it too late to buy?

Solar Technology Stocks Defy Logic

I’m confident investors are responding to an “it could’ve been worse” scenario.

Case in point is Yingli Green Energy (NYSE: YGE), which recently posted a $20.7 million quarterly loss and reduced its outlook for 2009.

The stock climbed 32% over the next three days!

Rinse and repeat for JA Solar (NASDAQ: JASO), Suntech Power (NYSE: STP), and the worst offender, Canadian Solar (NASDAQ: CSIQ), which is up 40% three days after reporting a loss of $0.13 per share.

By my calculations, this puts many solar technology stocks at the high end of reasonable valuation levels. In layman’s terms, that means these stocks are trading at several times what they’ll earn for the year.

Solar Technology Stocks: Example and Conclusion

Without getting too stuffy, stocks generally trade in line with their peers through what is called a valuation multiple. Let’s continue with the Canadian Solar example from above.

Given CSIQ’s current overcapacity and low gross margins, the should be trading–in my opinion–at a multiple of 9 to their future earnings.

Forecast 2010 earnings per share for CSIQ is $1.16, which means fair value is around $10.44. Yet the stock is trading above $13.00.

This is true for others in the group as well, though the broad multiple for solar stocks right now is about 12x.

What I’m getting at is that solar stocks, despite all their future promise, are currently a bit overbought. I’d be looking to take profits.

There will certainly be a shakeout before the next round of quarterly earnings comes out. That’ll be the time to buy.

To green energy and green profits,

–Chris

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