U.S. solar stocks have kicked off 2007 in grand style, averaging a 10% gain over the 6-week period, way ahead of the more diversified renewable ETFs (gaining 2.75%). Despite these strong gains, there are a few bad apples dragging down the performance of the group. If it were not for Distributed Energy Systems (DESC), DayStar Technologies (DSTI), Emcore (EMKR) and Energy Conversion Devices (ENER), U.S. solar stocks would have gained 22% over the last 6-week period.
Energy Conversion Devices (ENER – Last trade $30.30) started the year at $34.70, and went all the way down to $27.21 on Feb 12. Management’s credibility had been questioned after the announcement that sustained profitability was pushed out beyond the original target. The company was initially planning to become profitable by the end of fiscal 2007. (The company has operated 40+ years without sustainable profitability). Management is citing funding delays within the hydrogen division, a division that has recently taken "center stage" in their strategy.
The company operates in three segments: United Solar Ovonic, Ovonic Battery and ECD. The United Solar Ovonic segment engages in the design, development, manufacture, and sale of PV modules. The Ovonic Battery segment manufactures and sells rechargeable NiMH batteries and battery materials, while the ECD segment is involved with research and development activities.
With the shares trading close to 52 week lows and momentum indicators now turning bullish, is this the time to jump on board and take a bite at the bad apple?
Management's new focus on the hydrogen division does not make sense, given that the hydrogen business is still in its infancy and may take several years to reach commercial volumes. If ENER shares are to rise, management should remain focused on the photovoltaic or hybrid electrical vehicle batteries, both already commercially produced, and at or near profitability.
The hazy new strategy of management will come as no surprise to investors, with shareholders well aware of their bad track record. ENER's annual return on assets is 2.84% (compared to the solar industry average of 6.79%) and annual return on equity is 3.33% (compared to the solar industry average of 16.63%).
Management's poor performance has led to ENER's second largest holder, Coghill Capital Management, to boost its stake to 8.6%. It appears that Coghill is taking an activist stance on the issue, suggesting the company's board should consider making management and other changes to the company.
The future of ENER’s share price will depend on Coghill's success at convincing management to remain focused on the photovoltaic and hybrid electrical vehicle batteries. But the fund has only made two activist filings since 2003, so investors can't be assured of Coghill's success.
If ENER management can provide greater transparency into its business units and move focus back to profitable areas, investors could be richly rewarded. There are some signs of positive change taking place at the company. On Feb 7 the company announced it had formed a committee to develop a succession plan for its management team, including CEO Robert Stempel.
With the high valuations seen in the solar sector, ENER is a relatively cheap gamble, but it's still a gamble. Perhaps it’s better to wait for signs of positive management changes before taking a bite at this one.
Disclaimer: I do not own any stocks mentioned above. I do not give investment advice. Do your own research. Do not rely on anything in this blog to make investment decisions. Consult an investment professional familiar with your specific financial situation before buying or selling any security.