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Archive for October, 2008

Conversation at the Gym

October 31st, 2008 1 comment

Man (Pointing at Obama on one of the TVs): Politics are crazy!

Woman on eliptical: Tell me about it.  So much money goes into all that stuff.

Man (a moment later nodding to a clip about the World Series):  I wish I played baseball, even the league minimum would let me retire after a couple years.

Woman:  Yeah that’s definitely outrageous.  I think there should be a way to limit the amount of money those people make.  It’s not like they’re adding that much value to society.  Even CEOs make way much more than they’re really worth.  I think they should make a law that would make things more fair and equal.

Man: Me too.

Woman (point back to Obama on TV):  I think he’s crazy too, wanting to do all that wealth spreading.

Man: Me too.

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Paying More Dues

October 29th, 2008 1 comment

Well, today I spent $45 on tuition at the school of Stock Markets.  I made a dumb amateur move.

I meant to sell some call options for GM to get a little cash, but instead I clicked “Buy”.  The order summary page looked a little strange, and I used my software engineering background to assume they had a bug.  I thought “they need to fix that!” and I clicked “Submit”.

So very stupid.

When I realized what I had done I had to sell the options back to the market to close out my position.  I paid $24 in commissions and $21 to Mr. Market because of the spread in bid/ask prices.

The only good thing to come out of this is that I can guarantee I won’t ever do that again.  Imagine if I was dealing with thousands of dollars instead of hundreds???

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To Buy Or Not To Buy… Solar

October 17th, 2008 4 comments

Mike B, an avid reader of this blog :) , sent me an email mentioning solar stocks. At this very time, stocks have recently been hit pretty bad, making many stocks seem cheap relative to historical prices. I’ve been eying a few companies myself in the solar market, so I too am curious if now would be a good time to jump into the market. I’m going to focus this post on two stocks we can compare, First Solar (FSLR) and Suntech (STP).

First off, let’s do some basic evaluation of the companies and their stock price. FSLR is currently trading at $135 with a market capitalization of $10.3 billion. STP is trading at $21.75 with a market cap of $3.3 billion. In the last 12 months FSLR has made a profit of $2.68 and STP $1.32. This gives them Profit to Earnings ratios (for trailing 12 months earnings) of 50 and 16 respectively (average US PE is around 16).

Here’s a breakdown of these numbers:

What does this tell us? Well FSLR is still very expensive relative to what they earn. STP is still kind of pricey too. What’s the reason for this? Growth!

If you look at expected future earnings, FSLR’s earnings are supposed to grow to $3.67 from $1.40 (FYI 2007 to 2008) and STP to $1.67 from $1.02 (also 2007 to 2008). This gives them growth rates of 162% and 63%. So now we can see why FSLR is about 3 times as expensive as STP even though it only has 2 times the profit.

To take this a step further you can look at a ratio that allows you to compare these two company’s earnings with their growth rate called PEG. This is Price to Earnings to Expected Growth rate. So lets look at these:

So what do these numbers tell us? Well according to Peter Lynch, who says “The P/E ratio of any company that’s fairly priced will equal its growth rate” the companies aren’t actually overpriced since the PEG ratio is less than one.  In other words, Peter Lynch would say that the current growth rate more than makes up for the fact that these companies are priced pretty high when just comparing the PE ratio.

So what to do? Well, you can look at it two ways.  One, the stocks are both pretty expensive for their current performance.  On the other hand if they continue to grow at this rate, then they could turn out to be a pretty good deal, if you bought right now, if your in it for the long run.  The big factor though is predicted future earnings.  If you think demand for solar might drop because of a slowing US economy then the growth rate might not end up being as high.  If you think too many solar companies are jumping into the market leading to oversupply, again the companies might not make as much money.  Or everyone could be way underestimating how much demand there is for solar, and every house in America could end up with solar panels on the roof, making the companies trillions more than ever expected.

This is one of the hardest parts about buying a growth stock.  It seems like it all comes down to how well you can predict the future.  I don’t think I’m currently going to be buying either of these stocks, because it seems like there is too much unknown about the future, but it might end up being the perfect time to buy.  People like me are probably the reason why the stocks are lower…

One other thing that might be good for someone in Mike B’s position would be to look at an alternative energy ETF. This basket of stocks would diversify some of the risk these somewhat expensive stocks yet allow you to capture some of the upside if the solar industry takes off. PBW is one that comes to mind.

And that’s all I have to say about Solar.

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