With the high fuel prices over the past year, solar stocks have been making some nice gains. But there are some signs that they may not be as safe as they appear. Investors' interest in solar companies increased due to soaring crude futures, but there are some factors to take into account before investing money into solar.
The current BusinessWeeklooks at stocks such as First Solar (NASDAQ: FSLR), SolarWorld and Evergreen Solar (NASDAQ: ESLR), which have been facing increased volatility based on contract deal news or the lack thereof.
A major impact came in May, with speculation that Germany would lower subsidies given to companies and individuals who install alternative energy equipment. But the cut was not as deep as expected and stocks rebounded nicely.
MOST NOTEWORTHY: CBS Corp., Thornburg Mortgage and DiamondRock Hospitality were among today's noteworthy downgrades:
CBS Corp. (NYSE: CBS) was downgraded to Market Perform from Outperform at Wachovia, citing the weak ad environment and potential M&A strategy to acquire growth, which will limit upside near-term.
Thornburg Mortgage (NYSE: TMA) was downgraded to Underperform from Outperform at Friedman Billings, which said the recent capital raise and related transactions result in 95% dilution, and questions how shares will trade when 2.9B restricted common shares are registered and start trading in mid- May.
DiamondRock Hospitality (NYSE: DRH) was downgraded to Neutral from Outperform at Baird following the company's reduced guidance.
OTHER DOWNGRADES:
Savvis Inc. (NASDAQ: SVVS) was downgraded to Equal Weight from Overweight at Lehman following the company's Q1 report and guidance.
Memc Electronic Materials (NYSE: WFR) was downgraded to Neutral from Overweight at J.P. Morgan, who cited high Street expectations and a very tight capacity expansion schedule over the next few quarters.
After hitting a one-year low of $49.70 in August, the stock hit a one-year high of $96.08 in December. This morning, WFR opened at $73.40. So far today the stock has hit a low of $70.07 and a high of $73.65. As of 12:35, WFR is trading at $70.42, down $4.93 (-6.5%). The chart for WFR looks bearish and steady, while S&P gives the stock its highest 5 Stars (out of 5) Strong Buy rating.
For a bearish hedged play on this stock, I would consider a May bear-call credit spread above the $80 range. A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 7.5% return in three weeks as long as WFR is below $80 at May expiration. MEMC would have to rise by more than 13% before we would start to lose money. Learn more about this type of trade here.
WFR hasn't been above $80 in the past month and has shown resistance around $77 recently. This trade could be risky if the demand for solar materials spikes in the next few weeks, but even if that happens, this position could be protected by resistance WFR has demonstrated over the past month at its 50 day moving average, which is currently around $78.
DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in WFR.
This market is tough. Pros and novices alike are having a tough time. Particularly in a down market, a market commentators like to call a ""stock picker's market," I find it illustrative to dig deeper into the holdings of those special professional money managers that have found a way to make a go of it.
Take the CGM Focus (CGMFX) fund. This fund consistently shows up at the top of 1-year, 3-year, and multi-year best performers. CGM Focus has returned on average 37% per year for the past five years. While this is absolutely no guarantee that it will continue to perform like this, fund manager Chuck Heebner seems to have the special sauce -- at least for now.
So, what has been so successful for the fund?
Commodity picks like fertilizer plays Potash (NYSE: POT) and Mosaic (NYSE: MOS) have been big positions and have been big winners. Steel plays like US Steel (NYSE: X) have performed very nicely for CGM as well.
Looking at what worked is somewhat like looking into a rear-view mirror. These gains were in the past. What's Heebner and team buying now?
While the markets were up at the end of the trading day, there would be no other way to describe the day besides boring. The good news is that boring days are needed after periods of major volatility.
Today's news could have easily been dominated by a rise in weekly jobless claims hitting a high not seen since September 2005, with a reading of 407,000. The market was only looking for 365,000 to 375,000. But taking the center stage were Ben Bernanke, Jamie Dimon, and Alan Schwartz all defending the bailout and buyout Bear Stearns Companies (NYSE: BSC) in front of Congressional hearings for a second day. Below are the unofficial closing prices for today's US exchange levels
Memc Electronic (NYSE: WFR) is recently trading at $68 in pre-open trading, below a close of $76.39.
WFR lowered Q1 revenue to approximately $500 million versus consensus estimates of $559 million. WFR experienced a build up of chemical deposits inside the new expansion unit at its Pasadena, Texas facility.
WFR overall option implied volatility of 59 is above its 26-week average of 56 according to Track Data, suggesting slightly larger price fluctuations.
Option Update is provided by Stock Specialist Paul Foster of theflyonthewall.com
Over the past few months, solar stocks have had more than their fair share of ups and downs. Last month, they were so volatile it seemed as if I was writing an article about another solar play every other day, introducing investors to the sector by casting the characters in a fictional movie to be called Solar's Eleven, encouraging buying on breakouts in this article, and warning investors to drop them as if they were poorly selling music artists in this article. (Yes, I go over the top sometimes, but it's all to help you better understand how the stock market works.)
So, what changed? Perception. While these companies all still have great potential, they are speculative and in bear markets, speculative stocks, especially those that don't continuously put out spectacular news, get crushed -- as shareholders in Apple (NASDAQ: AAPL), Baidu.com (NASDAQ: BIDU) and VMware (NYSE: VMW) have learned the hard way.
"I can't believe I won," cried Jordin Sparks, winner of last year's American Idol. Within seconds, industry and non-industry drones alike began formulating ways to attach themselves to her in some way, crazy in anticipation of the inevitable riches.
Months later, several Wall Street types were overheard saying, "I can't believe oil keeps going higher, alternative energy stocks are going to be hot, hot, hot," and thousands of investors went wild buying shares of the dozen or so solar stocks, crazy in anticipation of the inevitable riches.
Each industry has its stars: Kelly Clarkson, Carrie Underwood and Clay Aiken -- as determined by album sales -- for American Idol, First Solar (NASDAQ: FSLR), Sunpower (NASDAQ: SPWR) and MEMC Electronic Materials (NYSE: WFR) -- as determined by stock performance -- for the solar industry.
Two of the digital-age growth trends include semiconductors and solar power, so when one can potentially capitalize on both in one stock, it makes for an appealing investment opportunity. MEMC Electronic Materials does just that.
MEMC Electronic Materials (NYSE: WFR) designs, manufactures and provides wafers and intermediate products for use in the semiconductor, solar and related industries.
Analysts see 2008 revenue increasing 20-30% after a likely solid 23-27% increase in 2007. Backorders also are impressive. Meanwhile, the sector's outlook provides additional cause for optimism, with solid demand for both solar wafers and semi wafers seen in the immediate years ahead.
MOST NOTEWORTHY: Washington Post, Harvest Natural, Memc Electronic Materials and Boston Private Financial were today's noteworthy upgrades:
Deutsche Bank upgraded shares of The Washington Post Company (NYSE: WPO to Buy from Hold to reflect the company's exposure to the counter-cyclical education division.
Jefferies upgraded shares of Harvest Natural Resources Inc. (NYSE: HNR) to Buy from Hold and raised their target to $17 from $11 after the company received final approval in the conversion to a mixed company. They note that conversion clears the way for renewed investment.
Friedman Billings added Memc Electronic Materials Inc (NYSE: WFR) to its Top Picks List following its Q3 report and guidance as "solar wafer contracts," not including spot poly, are expected to increase from 15% of the total to 35%-40% in CY08 and greater than 50% in CY09.
William Blair raised its rating on Boston Private Financial Holdings Inc (NASDAQ: BPFH) to Outperform from Market Perform after the better-than-expected Q3 results.
OTHER UPGRADES:
Goldman added Dell Inc (NASDAQ: DELL) to its Conviction Buy List.
NTT DoCoMo Inc (NYSE: DCM) was upgraded to Hold from Sell at Citigroup and to Buy from Neutral at UBS.
Here we are at the halfway point of our experiment to see how fast a portfolio would grow if the perfect stock pick was made each year for 10 years. From $100 invested at the beginning of 1997, we'd begin 2002 with nearly $3.5 million. Winning picks in the first five years of this game have emerged from the Internet, telecom, healthcare, and electronics sectors.
2002 proved to be rock bottom for the U.S. markets and our portfolio, as the best-performing stock rallied "only" 113% during the year. That pick was MEMC Electronic Materials (NYSE: WFR), which manufactures silicon wafers for semiconductor companies. At the turning of the year, WFR was trading at $3.56, and 952,930 shares were scooped up. After its 113% gain, the shares were trading at $7.57, and the portfolio was valued at $7,213,680.
In mid-October, the S&P 500 Index reached what would prove to be a significant market bottom, and buying power was again drifting into the market. Would the renewed sense of bullishness have a positive effect on our portfolio?
Tonight, Cramer continued his "going green" segment after changing his stance on alternative energy stocks last night.
One he really likes is First Solar (NASDAQ: FSLR), which can compete head to head with traditional power companies in the fairly near future; he's liked it since March and it's up 30% in that time. MEMC Electronics (NYSE: WFR) is the other one he likes because they make the silicon wafers for solar panels; this one is up 200% since Q3 2006 and he has been positive on this one all the way up because there is a silicon shortage and the company is well-positioned to capitalize on it. Cramer did say that these names are all up big big, so what you really want to do is look for these on pullbacks when they get cheaper.
There is a much safer way (safe is a "relative term" only) to invest in alternative energy, and you won't be risking it all in a single speculative name. A few names I have looked at for exposure to "Alt-En" and that I feel better about are actually what I call the "Alt-En" ETF's, and these may offer you a safer mix of companies since some of the holdings are actually diversified and have many different operations. The PowerShares WilderHill Clean Energy ETF (AMEX: PBW), PowerShares Cleantech ETF (AMEX: PZD), PowerShares WilderHill Progressive Energy Portfolio (AMEX: PUW) will all give some alternative energy sector exposure that won't as easily rip apart your wallet if you make the wrong pick. ETFs will not give you the upside potential of a single speculative play, but if you've been doing this long enough, you already know how painful picking the wrong name in the right sector can be. Alt-En ETFs give you exposure to the sector without the company-specific risk.
Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.
John McNay, portfolio manager of Essex Investment Management, provided some good investment ideas on the evolving high-tech power business in this weekend's Barron's Magazine (subscription required). A few of these we blogged about in the past, but they're worth noting again.
Sunpower Corporation (NASDAQ: SPWR), the Cypress Semiconductor Corporation (NYSE: CY) spin off, makes semiconductors for solar cells and solar panels
MEMC Electronic Materials Inc (NYSE: WFR) makes the polysilicon that is needed to manufacture the solar cells and panels based on semiconductor technology
Suntech Power Holdings (NYSE: STP), First Solar Inc (NASDAQ: FSLR), Canadian Solar Inc (NASDAQ: CSIQ) and Trina Solar (NYSE: TSL) were other stocks mentioned.
Sunpower and MEMC we have blogged about and know the companies reasonably well. The others you have to do your homework on, as these are new ideas to this Fly.
TJ Rodgers, Cypress Semiconductor's CEO, referred to Sunpower as Intel during the 1970s. That is a big statement. This is an important industry that will get a lot of investors' attention during the next five years. Solar energy utilizing semiconductor technology is an investment theme that is still in its very early stages.
With the high fuel prices over the past year, solar stocks have been making some nice gains. But there are some signs that they may not be as safe as they appear. Investors' interest in solar companies increased due to soaring crude futures, but there are some factors to take into account before investing money into solar.
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Here are some highlights from this past week's 
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The week in preview: New quarter earnings kick-off
Comfort Zone Investing: Keep your recovery expectations real
Will Americans have to slim down to fit into their cars?
