Shedding Some Light on Solar PV Valuations

Wall Street investors and analysts amuse me. I'm not sure they are paying attention. There seems to be a huge disconnect between the value of CdTe (Cadmium Tellurium) and cSi (Silicon) based solar stocks. Which technology is superior? Who cares! The bottom line is that all solars compete in the global market and are subject to the costs of production and the market selling price. What I want to show here is the wild bets in stock valuations in spite of cSi solar producers' similar performance metrics.

The following table is a download from finviz.com sorted by Market Cap.

There are 3 metrics that Wall Street uses to represent value when the number is less than one. I think it is important to discuss their meanings for less experienced traders, briefly defining their meaning below:

Price Earnings Growth [PEG] is the measure of PE divided by Growth. Every single silicon cSi stock has indeed had phenomenal growth, as is evident in the far right column in the above table. As a result, most of the PEG numbers are very low. Price/Earnings or PE is also low (Wikipedia states the PE typically runs 10-17), contributing to the excellent PEG score for cSi stocks. The PEG number represents value when it is less than one, since high growth and low PE are desirable traits. PEG is a historical performance metric, since PE and Growth are generally expressed over a full year.

The Price/Sales (P/S) ratio is yet another metric that determines valuation. It basically gives a measure of the cost to the investor to access the sales revenue. Say you buy a stock having a billion in sales at a cheap price. The billion in sales represents potential, and the price paid for the stock represents access to the sales revenue. It is a measure of value tied to the revenue stream that may represent increased return on increased net margin or revenue down the road. It represents current valuation.

Price/Book (P/B) indicates a stock's relationship between the price you pay versus its book value. Again, large book value drives the number lower. Think of it as a the discount ((below one) or overage (over one) you pay to own your fair share of the stock's value. It represents current valuation.

For complete information about PEG P/S and P/B ratios, Wikipedia is an excellent source, and I have included links below.

Clearly, First Solar ( FSLR ), the only maker on this list making CdTe solar product, has the highest market cap of all the stocks on the list. China Sunergy ( CSUN ) has the lowest. Market Cap indicates Wall Street's valuation of a particular stock without regard to shares issued. Market Cap should be a function of a company's worth and earnings prospects. For this reason, we definitely want to overlay equity and earnings on our charts side, comparing them to the market cap. Market cap is, by nature, an expression of exuberance of the investor, while increased earnings and equity marks the underlying real value. P/B, P/S and PEG are just supporting metrics that indicate a normalized ranking in value. What I am getting at is that Market cap should have high income and equity to support it, but if the normalized rankings are high, the stock may have peaked. We expect high market cap stocks to have high equity, high income and probable higher P/B, P/S and PEG ratios, unless Wall Street has not realized the deal on the table. What we are looking for are undervalued stocks that have low market cap, high equity, and high income with lower P/B, P/S and PEG ratios.

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