Thursday, May 15, 2008
After the earnings report (solid) and guidance (not so much) from LDK Solar (LDK) earlier this week, I cut back my stake. I've decided to sell out completely today for a few reasons. First, the sophistication level in solar seems to not be so high so these stocks all trade in tandem... if company A reports a bad number they all sell off, or if company B reports a good number they all go up. So in some ways a basket approach is a bit useless. Second, I think LDK Solar is more of a late 2008 to mid 2009 story so I'll revisit it then. While it can jump in the meantime (up), I believe it will just be due to the sector and not anything specific to the company, so I can get that same 'sector' exposure through other names (with less headwinds). I want to keep my solar exposure (allocation) consistent - and I've piled a lot into Trina Solar (TSL) due to its valuation and prospects the next few quarters. I'd rather own more Trina, than put that same money into LDK Solar.Now we do have some risks owning Trina as well, as (1) the market is well overdue for a correction (2) the solar sector has exploded and is due for its own correction and (3) Chinese leader Suntech Power (STP) might have a bad quarter due to some company specific situations and it reports next week (Trina is not out with their date but they report next week as well)- and as I said above, when 1 name has a bad quarter people trash the whole sector, regardless of individual fundamentals.
So while I've moved Trina Solar up to the top stake in the fund, I've cut back elsewhere to keep my allocation flat. At this point Trina Solar could gain 100% from here, and only trade at par with valuations of its peers such as Suntech Power (STP) or Yingli Green Energy (YGE) - this is why I am willing to hold it even though the above 3 conditions could lead to a sell off in the name. It's valuation is just that compelling, and it is being missed by the market. So as a warning ahead of time, we might take some losses in the near term (weeks) from this position but I think by end of year 2008 this will be a huge winner, and when I think of applying new money to the sector I'd rather go there instead of LDK Solar. With earnings from Trina coming in a few weeks I'll know shortly if this thesis is correct; but I'm going to a more narrow focus in the sector (less names). Once again let me stress this sector has come a long way in a short time and all the names are at risk of substantial pullbacks - and when this group pulls back it does not mess around - 25-30%+ pullbacks are the "norm".
I'm selling the last 150 shares of LDK Solar around $36.00; this has been one of the fund's biggest losers [Top Fund Winners and Losers] and I've owned it since Aug 30, 2007. I do believe it will have a nice 2009, but the chart below shows how it has done since September 07, and how difficult it has been to make money in this name.
Long Trina Solar, Yingli Green Energy in fund; long Trina Solar in personal account
Source: www.fundmymutualfund.com
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