Renesola Ltd. (SOL) is trading sharply higher today with little new company specific information has been released. At ZachStocks we have been watching the solar sector carefully over the past months and found plenty of great opportunities in the area now that investors are once again warming to the alternative energy area. For Renesola to rally without specific news is certainly a positive thing and it may represent one or two large institutions building a new position.
Some have speculated that since SOL has crossed over $5 per share, it is now eligible to be held in many mutual funds who prohibit their managers from buying stocks with prices lower than $5. While this makes little fundamental sense, sometimes technical levels like this can provide the catalyst needed to get stocks running to a point where they are more closely trading with their fundamental values. At this point it appears the fear of a major collapse in solar energy is being brushed aside and liquidity concerns are no longer the driving issue for investors.
According to Thomson estimates, SOL is expected to earn 53 cents per share in 2010. If these expectations are correct, the stock has just recently moved to the point where its forward PE is over 10. This is a major milestone since the market had been pricing these companies at low single digit multiples for some time. But I see this trend of multiple expansion continuing higher as confidence builds. While we may not see multiples of 30 or 40 as was the trend in early 2008, a multiple of 20 on strong solar growth companies is not out of the question.
Multiple expansion may be only one part of future gains as I expect analysts to ratchet up their numbers in coming months. During times of economic expansion, analysts can get ahead of themselves and present estimates that are very optimistic. But during times of contraction like we saw in the last 18 months, analysts often shoot too low and fail to realize the ability of companies to adjust models and build profitability. The estimate of 53 cents for 2010 could prove conservative and be significantly higher in the quarters to come.
If you add the forces of increasing estimates with expanding multiples, you can see that the stock price could rise exponentially. A multiple of 10 on 53 cents estimate leads to a stock price of $5.23. However if both the estimate and the multiple rise by 30%, the stock price would rise not by 30% but closer to 71%.
- Earnings of $0.53 increased by 30% makes $0.69 in earnings.
- A multiple of 10 increased by 30% leaves us with a PE of 13.
- 13 times $0.69 brings the stock price to $8.95 – 71% above $5.23
And if increases turn out to be higher than 30%, the ultimate rise in the stock price could be much higher. So while many solar stocks have rallied by large percentage points off their lows this year, the best could still be yet to come as government stimulus programs kick in, traditional energy prices rise, and the promise of economic recovery drives optimism for investors.
FD: Author does not have a position in SOLRenesola Breaks Out – Entire Sector Showing Life