SPWR – Good Companies are Not Always Good Investments

SunPower (SPWR – $46.40) has been on a medium uptrend since the September 2006 low of $26, and after strong gains in the last few sessions on the back of above average trading volumes, the share price is testing the all time high of $48. Bank of America (BAC), DeutscheBank (DB), Citigroup (C) and Thomas Weisel (TWPG) are among the cheerleaders for the stock, all saying that SunPower's prospects are among the brightest in the solar sector. While the stock is testing its all time high, I can't help wondering if this good company is a good investment.

SunPower (SPWR – Last trade $45.50), a spin-off of Cypress Semiconductor, makes high-efficiency solar-power cells. The stock was recently trading at more than 166 times earnings, compared to the current industry average of 25.42. The firm's fundamentals justify the premium, but I can't help feeling a sense of Internet bubble deja vu when looking at SPWR.

SPWR understands that margin pressure, resulting from reduced barriers to entry into the solar market, can be partially offset by vertical integration throughout the solar PV value chain. The company has taken action to integrate both downstream and upstream. SPWR'S recent acquisition of PowerLight, and its promotion of an integrated roofing tile, will enable SPWR to extend its differentiated product offering in the near term. Bank of America analyst Eric Brown said that the acquisition of PowerLight should complement SPWR's consolidated margins, given the expected competitive strength of the PV integrators.

In addition to their integration efforts, SPWR's high-efficiency cells should continue to provide a source of pricing power going forward. The company seems to have their costs under control, with a relatively low cost of installation due to its higher efficiency cells.

SPWR reported Q4 EPS at $0.18 (consensus at $0.17) and revenues at $74.5M (consensus at $71.9M). SPWR also provided bullish guidance at the end of January. They guided Q1 EPS between $0.18 and $0.20 (compared to the consensus at $0.17), and guided FY07 EPS between $0.90 and $1.00 (compared to the consensus at $0.87).

The share price is currently trading above its 50-day moving average and encountering stiff resistance around $45. I'd only like this stock for a near term trade if the price drops and trendline support holds (around the $42 region). Momentum indicators on daily and weekly charts show limited upside for the share price in the near term.

SPWR is a great company, but good companies are not always good investments. Most of the good news seems to have been priced in already, and I don't think there is much upside going forward.

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