Stocks with shaky fundamentals and high multiples get hit the hardest in a market downturn and should be avoided when markets look stressed. Examples include solar stocks such as
(TSL - Get Report)
Yingli Green Energy
(YGE - Get Report)
(CSIQ - Get Report)
. But a market selloff can be a good opportunity to pick up cheap shares of oversold stocks with rock-solid fundamentals. The best example is
As the markets were melting down last week, I ran a few stock screens to see which China stocks were getting hit the hardest and also to see if I could find anything with strong fundamentals that looked oversold.
By far, the worst performing China names from last week were the solar stocks, all of which were down by more than 20% for the week. The solar stocks all share some commonalities: They have a short or mixed profitability record and they have been trading on very high multiples.
However, the selloff also has dragged down other stocks such as Duoyuan Printing, which now trades at 6.5 times earnings despite 25% to 30% net margins, strong growth and a solid balance sheet. I was buying while others were selling.
Looking at the solar stocks, Yingli has been on-again, off-again with profitability and has nearly $700 million of short-term debt. Solarfun has just begun to eke out a profit recently but with a razor thin net margin. Suntech Power fares much better on the fundamentals side, but was trading at a price-to-earnings ratio north of 30 just a week ago, despite single-digit net margins. Now it trades on a P/E of 20 and could certainly go lower.
The fear with all of these stocks is that cash-strapped governments will be hesitant to continue subsidizing solar energy with government money and that solar profits will take a hit. From a valuation standpoint, they could have a long way to fall.
As solar was busy imploding, I was busy looking for stocks that might be oversold, getting dragged down with the market. Duoyuan Printing was the best name I found and I was picking up shares whenever the market looked its ugliest. I owned the stock earlier this year and have been watching it closely waiting for the right time to buy in. As recently as April, it was trading near $11, but now is selling for less than $8. If it trades down more I will certainly buy more.