[Editor’s note: The following article first appeared on the website www.zachstocks.com on October 30.]
JA Solar Holdings Co., LTD. (NASDAQ: JASO, Stock Forum) has seen its shares transformed from high-flying growth status to a depressed state in merely a matter of months. It’s like my old boss used to tell me, “Zach, there’s only a short distance from the penthouse to the outhouse.” Those words seem to ring true more often than I would like to admit.
During our period of rising oil prices and fears over global shortages, the alternative energy sector got a lot of attention on Wall Street. While there are many different technologies to choose from, solar energy seemed to offer the best yield and so much investment was made in this sub-sector. As factories scrambled to compete for raw materials and capacity levels began to increase exponentially, stock prices for these darlings shot up to two, three, or even more than five times their previous values.
However, all good things come to an end, and unfortunately the veracity in which stock prices rise is often reflected inversely as investors flee investments that used to hold a very dear place in their hearts. Over the summer we have seen stocks like LDK Solar Co., LTD (NYSE: LDK, Stock Forum) drop from above $50 to below $15. Suntech Power (NYSE: STP, Stock Forum) has declined from a high near $90 to below $15, and even the “best of breed” First Solar, Inc. (NASDAQ: FSLR, Stock Forum) has fallen from more than $300 to at one point below $100. The primary issue driving lower prices is the assumption that a global recession will cut the demand for energy of all kinds, and therefore investments in alternative energy will no longer have an advantage over traditional means.
JA Solar has been hit especially hard because on top of the macro-concerns, the company also had a close relationship with Lehman Brothers and was hurt financially when the investment bank failed. Take a look at the challenges faced as a result of the bankruptcy:
- A loan to Lehman in the amount of $100 million will now likely not be repaid
- JASO also loaned shares of its own stock to Lehman that are not recoverable. - This adds roughly6.56 million shares to the count, diluting current shareholders.
- JASO also purchased a call option from Lehman paying $17 million for the contract. Not only do they not get to capitalize on any gain, the $17 million is now lost.
So these systematic and company specific issues have now brought the price down just below the $5.00 level. Interestingly, this is the same level as the IPO price before the three-for-one split back in February. Although the IPO was over a year ago, this level could serve as support if the stock is able to retake the line and move forward.
Despite all the gloomy news, the company has a good chance of continuing to turn out profitable quarters and grow shareholder value. At this point, expectations are still for the company to earn $0.96 per share this year and $1.45 next year. Even if earnings come in at half the projections, the stock price could still represent a significant value. It is almost as if Wall Street is pricing in a 50% chance that the company will go completely under. Yet, JA Solar continues to see its sales increase, the company has beefed up its capacity, and there is virtually no debt on its balance sheet.
The company reports earnings on November 12th before the market opens. Even if management issues bad news, it is unlikely the stock will drop from this point. One possible lower risk way to play this name would be to buy the December 5 calls. While they are trading for roughly $1.20 at the time of writing, the potential for the stock to run as high as $10 or $12 in the short run appears fairly strong. At the same time, one would only be risking $1.20 per share if the price did not rise. But when trading options, please use caution as spreads can be very wide and the contracts can be less liquid. Also, I would caution readers to only buy the number of options that represent the number of shares they would be willing to purchase outright.
In closing, JASO has had to face some serious challenges over the last 2 months, but it appears to have a strong business model and the potential to ramp earnings significantly. While risks are still in place, those unknowns appear to be priced into the stock leaving more room for positive surprises than negative ones. I would welcome reader comments on this name or other solar ideas.
Disclosure: Author is long shares of JA Solar.
This article was written by a member of the Stockhouse community.