Vindication in LDK Solar

Accounting irregularities my a$$. Took profits at $73 and bought back at $68. I never lossed sleep over LDK since my purchase at $38 back in October even though it fell as low as $26. My conviction and belief in the company remained strong even as the charts blew up. I did however fail to execute my game plan which was to average down under $30. The charts made me hesitant to pull the trigger despite my confidence that the stock would make a full recovery. And I could have afforded to double down in shares and still not be overly positioned in my portfolio. The lesson I learnt is that charts can fail to tell the truth from time to time and that news can be the leading indicator for movement. By focusing more attention on the charts, I missed a great opportunity to triple my returns. Had I remained more concerned with the news, I would have realized that it was a shoe in that the audit report would come back without a hitch. The solar wafers are not easily accountable given the grade variance and storage space which can make accounting difficult and it's human nature that we make errors. The internal investigation came back clean and LDK's CEO kept reiterating that there were no material adverse changes in the company despite the rumors. The company continued to sell contracts and also raised guidance as the stock price declined which provided a lot value for savvy investors. Downside risk had been factored in and then some. The upside return will be unfathomable. Next time I will by options to better mitigate my risk/reward when an opportunity like this presents itself.

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Fundamental analysis originally posted on google message board November 4

http://www.cnanalyst.com/solar/index.html

After doing even further extensive homework on solar stocks, I have to
reiterate LDK as being the cheapest and the most valuable player in
its industry. Although I like to look at P/E multiples, growth and
profit margins are even more important in my opinion. Also, I tend to
invest in profitable companies so stocks currently with negative
earnings I do not cover. With that said, to me it makes no sense to
see LDK and WFR lagging behind FSLR and other solar stocks. These two
companies are making < 100% return YTD yet First Solar is making
nearly 400%. Perhaps LDK will catch up or FSLR will fall or maybe
both may happen. I do not disagree with the fact that every company
is different, but one has to wonder if they really are that different
from each other to cause such a huge range in stock prices. The stock
market is irrational; otherwise I'm just an ignorant investor. Yes
LDK is being accused of fraud with a potential 25% inventory
overstatement and thus receiving bad PR, but shouldn't the closed
contracts and growth offset most if not all of this? Is the stock
price being manipulated? Can we not trust this Chinese company, but
other non-profitable ones are fine to invest in? As Penn and Teller
would say, "this is BULL$HIT!"


Based on the FIRST CALL EARNINGS VALUATION REPORT, the industry (not
specifically focused on solar) growth rate is 15.3% and PEG ratio of
1.64. LDK, 3 analysts give a 5-year growth rate consensus of 50% for
a PEG ration of 0.60! Moreover, their net margins are 31%. Here are
the other solar stocks' PEG ratios and net margins in order from
highest to lowest in market cap that are currently showing positive
earnings:


WFR (PEG = 0.77 based on 8 analysts) 32%
FSLR (PEG = 5.725 based on 2 analysts) 26%
STP (PEG = 1.40 based on 8 analysts) 13%
SPWR (PEG = 2.52 based on 12 analysts) 3%
LDK (PEG = 0.60 based on 3 analysts) 31%
YGE (PEG = 3.31 based on 2 analysts) 11%
JASO (PEG = 1.71 based on 7 analysts) 18%
TSL (PEG = 1.18 based on 1 analyst) 11%
SOLF (PEG = 2.63 based on 1 analyst) 10%


The downside of a negative audit has mostly been factored in to the
point that any news will boost the stock back up. I am not concerned
about the 25% inventory statement, but rather their integrity, net
margins, and quality of the wafers. The high margins give them that
competitive advantage as well as their growth with evidence to the 1
billion dollar facility being built for them. Here are some
theoretical price targets:


1. (Industry's PEG/LDK's PEG) x current price = target price based on
50% growth rate
(1.64/0.6) x $39.55 = $108.10


2. (FSLR's PEG/LDK's PEG) x current price = target price based on 50%
growth rate
(5.725/0.6) x $39.55 = $377.37


3. (Industry's PEG/LDK's PEG) x current price = target price based on
75% growth rate
(1.64/0.4) x $39.55 = $162.16


4. (FSLR's PEG/LDK's PEG) x current price = target price based on 75%
growth rate
(5.725/0.4) x $39.55 = $566.06


Based on the industry's PEG, FSLR should be worth $41.98 and LDK
should be worth $108.10. It is absurd to see FSLR rising and LDK
falling when it should be the reverse. I would agree with Jim Cramer
in that I wouldn't pay for a stock with a PEG over 2. At the same
time however, he is very very wrong when he blatantly told people to
sell sell sell this stock when the accounting irregularities have yet
to be proven and have been blown out of proportions. That douch is
recommending BIDU as a buy with a PEG of 3.28!