Do These Speculative Plays Have Room To Double?

Chris Lau, Kapitall: When a stock doubles or more, it is hard for market participants missing the initial rally to make a move. The reasons could vary, but includes fear of a stock reaching a top, pride, or an unwillingness to speculate. This is the case for companies in the solar energy space and conglomerates in Japan.

Solar Rally Continues

In the solar energy sector, Yingli Green Energy (YGE) and First Solar (FSLR) are up. Yingli is up 149% in the last six month, while First Solar is up 279% in a one year period. Yingli would be up even higher if it were not for the recent profit taking:

An urgency to cover short positions could explain the recent rally. Short float was 28% for First Solar.

In addition to Yingli raising guidance, the macroeconomic environment is improving for the solar energy sector. JA Solar (JASO) reported quarterly results that were higher than consensus. The company reported a loss due to lower PV pricing, but shipment rose 20.8% to 442.7 megawatts. JA Solar expects margins to a positive 6% in the current quarter, and reiterated that it would produce between 1.7-1.9 gigawatts in the fiscal year.

Japan’s Sony Defies Gravity

Helped by hedge fund manager Dan Loeb pushing for changes at Sony (SNE), shares have more than doubled from last October, 2012. Loeb wants Sony to maximize shareholder value. This could be accomplished by spinning off the entertainment unit or exiting the electronics business.

Sony is performing well in the smartphone market. Its Xperia line of phones, which runs on Android, is winning praise from critics, and sales are improving. On the television market, Sony plans to build 4K televisions. The problem with the TV plan is that it will take time before prices drop. 4K televisions are not yet on the mainstream market, and adoption of the expensive technology is uncertain.

Giant Pharmaceutical Company Rallies

In the Pharmaceutical space, Valeant (VRX) rose another 12.8% after rumors were made that it might buy Bausch & Lomb. On Monday, May 27, the company said it will pay $4.5 billion for the company, and another $4.2 billion in paying Bausch & Lomb debt. This makes the deal worth nearly $9 billion. The purchase will mean a $800 million reduction in costs annually for the merged companies.

Valeant is a company that has solid, disciplined management that grows by acquiring companies. Valeant shares more than doubled within the last three years:


Conclusion

A doubling in any of the companies mentioned is entirely possible, but it would be irrational. More likely, there could be a pullback in these companies, especially with solar energy plays. It will take several quarters to be sure that the glut in solar panels is ending, and that price erosion is moderating. Investors should favor solar suppliers whose costs are declining.

Sony shares could move either way in the near term. If a spinoff is planned, shares will keep rising. Conversely, Valeant will likely sustain its upward move despite the recent gains. The merger is enhancing shareholder value. This also gives the company growth in the area of dermatology.

Written by Chris Lau

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