With 68% of the S&P 500 having reported results, earnings are currently on track to have risen 6.8% year on year; more than double what analysts polled by Thomson Financial were forecasting on April 1. Investors seem to have adapted to the fact that the U.S. economy is slowing, earnings continue to be solid and the Fed is neither going to run to the rescue or to attack us.
But U.S. stocks look ripe for a pullback with the DOW 600 points above even short-term moving averages. An analysis of key indices across various global markets shows that gains in the "best" six-month period from November to April have been typically stronger than the "worst" six-month period from May through October.
Considering that we are likely to see a pullback in stocks, now looks like a good time to take some profits on JA Solar (JASO – Last trade $24.13). Based in China, JASO is a fast-growing manufacturer of high-performance solar cells. JASO’s parent company is Jing Long Group, China’s largest maker of silicon wafers. As the parent company of JASO, the Jing Long group has a vested interest in the success of JASO and supplies the company with a steady supply of silicon wafers.
Due to its stable silicon wafer supply and long-term sales contracts, JASO currently trades at a price to book ratio of 72.16, compared to the industry average of 3.96. JASO has a solid short history of execution, and the consensus among analysts is that the company’s expansion plans are on track to meet goals. For 2007, analysts see sales growth at about 90%, with earnings growth at about 30%. Their Q406 gross margins were down sequentially (23.9% vs. 26.2% prior), but the company is expected to maintain pricing strength with their key accounts.
JASO has a simple business model: It manufactures and sells silicon-based photovoltaic solar cells worldwide. The lack of vertical integration makes the company vulnerable to margin pressure from reduced barriers to entry into the solar market. It might be a better idea to sit tight and see how the supply/demand inequality of polysilicon plays out in the coming months before investing into a pure-play like JASO.
The company’s shares rallied last week on a positive mention in a popular investment newsletter, and gains were extended when parent Jing Long Group announced an additional supply agreement with Hemlock Semiconductor. It is still unclear how much of the Hemlock supply will come JASO’s way, but an additional supply agreement should come as no surprise. Jing Long has been receiving polysilicon supply from Hemlock for some time, so it is interesting to see such an overly positive reaction in JASO’s stock to the news. The news on the Jing Long contract is definitely a positive, but the market may be getting ahead of itself.
The old saying goes "sell in May and stay away." The recent rally in JASO might have been overdone, so it could be a good time to take some profits ahead of the expected downturn in stocks. For investors looking to buy JASO, wait for a more attractive entry point.
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