Weekends are a good time to run some stock screens and come up with fresh ideas. I always start with something simple in mid-cap stocks to see if I am missing anything obvious that maybe the market has overlooked too.
has a good collection of preset screens which can begin the search. I selected Yahoo's Mid-Cap Value screen which they describe as built to find "stocks with market capitalizations between $1 billion and $5 billion with a price-earnings ratio less than or equal to 15 and a quick ratio of greater than or equal to 1.0."
The quick ratio is a measure of balance sheet short-term liquidity, similar to the current ratio, but excluding inventory. In this way it implies turning assets "quickly" into cash to meet obligations, as inventory does not always move so fast. The higher the quick ratio, the better the short-term financial strength of the company. I'm not sure how important it is for near-term option trades, but it is probably highly correlated to cash flow and so is indicative of balance sheet health. A poor quick ratio would obviously be a red flag.
The initial run of the Mid Cap Value screen produced 157 names, which is fine if you want to sift through and compare them all. But, I wanted to narrow things down a bit and the preset screens allow you to do that immediately from built in menus. I wanted to make sure I was looking at stocks with price-earnings to growth (PEG) ratios below 1.0 and I also wanted strong price performers that were less than 20% away from their 52-week highs. Ideally, I would want to see stocks pushing their 52-week highs, but I like allowing for pullbacks that might give me even more opportunity. These tweaks reduced the list to 58 names, including Aeropostale (ARO) , Cephalon( CEPH), Taseko Mines (TGB) - Get Taseko Mines Limited Report, and two solar companies, JA Solar (JASO) and Trina Solar (TSL) .
Solar, now there's an area that might be showing some promise again since the pounding the industry took in the first half of the year after Germany, the biggest government subsidizer of solar projects, took away some of that fun in the sun. Since JASO and TSL showed up as Mid Cap Value on my customized screen with PEG ratios of .65 and .55 respectively, I thought they might also be considered Mid Cap Growth. The Yahoo! Finance Mid Cap Growth screen has as its criteria a PEG of 1.0 or less and earnings growth for the past 5 years of 25% or greater. I ran that preset screen without any adjustments and Trina Solar, a Chinese company, showed up again.
I have always been a little wary of the small solar companies, focusing instead on the U.S.-based First Solar (FSLR) - Get First Solar, Inc. Report and recommending it twice this year near $100. But Trina Solar strikes me as possibly the best-quality play among the smaller sun worshipers. Ironically, after running my screens and finding what I thought was a little gem, I came across the news that most of the Chinese solar companies took a big hit on Friday after U.S. trade authorities announced an investigation into alleged subsidies paid by the Chinese government to its solar companies.
According to Investor's Business Daily, "The inquiry was spurred by a complaint filed by the United Steelworkers union, which claims China's support of its solar power firms enables them to charge less than U.S. companies, giving them an unfair competitive advantage that undermines job growth at U.S. energy firms." TSL was down 9% and JASO lost 7.5% Friday on this news. Only the day before, Wells Fargo Securities and Cowen and Company reiterated their Outperform ratings and/or raised price targets on several of the Chinese solar power names, including TSL, ReneSola (SOL) - Get ReneSola Ltd. Sponsored ADR Report, which lost 10.5% Friday, and Canadian Solar (CSIQ) - Get Canadian Solar Inc. Report, which is, believe it or not, a Chinese company.
The question now becomes, "Is TSL still a good value-growth stock given this new uncertainty?" We have to wonder if investors and analysts are perceiving this investigation as portending such possible negative outcomes as revisions to past earnings, reduced forward earnings projections, or even U.S. trade sanctions. I think we should watch the stocks closely this week and listen to reactions from investors and analysts. If the sell off is more dramatic than the actual threat to its business, we might consider a bullish call play in TSL:
Trade: Buy to open 1 TSL March 25 call for $5.50 or less.
Beyond its P/E multiple near 11 and forward P/E near 9, and beyond its five-year growth rate of 66% and current growth above 20%, TSL is only a $2 billion dollar company. If it were a U.S. company, we would look at it as a possible acquisition target. Since we can't be sure what the Chinese government will or won't allow on that front, our speculations are useless. All we have to go on is what more we can learn about the firm and its management to see if it can maintain those growth numbers, without or without government subsidies. Apparently the support that the Chinese give their solar power firms is not considered as noble as that which the US gives its agriculture, energy, banking, or auto industries.
At the time of publication, Kevin Cook held no positions in the stocks or issues mentioned.
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