There's nothing quite like a big share buyback to show that management has faith in a company. Buybacks have the effect of increasing each share's ownership in a company, and should therefore increase each share's value.
But in the case of solar stocks, buybacks may help give more legitimacy to solar manufacturers who are trading at ridiculously low valuations. Some of the solar sector's most popular names have announced some big buybacks recently that may provide shareholders with more value.
(NYSE: LDK)started the trend in late June by announcing a $110 million buyback of American Depository Shares, or ADSs.
- On August 8, JA Solar
(Nasdaq: JASO)said it would be purchasing $100 million of its own ADSs.
- And Renesola
(NYSE: SOL)followed with a $100 million share repurchase program this past Monday.
The fact that these companies are based in China has given me at least a little pause that we may not be able to trust everything they are reporting. But if these buybacks proceed as planned and reduce shares outstanding, it would be a big confidence boost for these stocks.
Don't forget about the debt
There's just one problem I see with buying back shares now. In LDK Solar and Renesola's last quarterly reports they had $1.6 billion and $428 million of short-term borrowing. Wouldn't it be smarter to reduce debt risk instead of buying back shares now?
JA Solar, on the other hand, has a much stronger balance sheet with long-term borrowing and convertible bonds replacing the short-term borrowing that competitors rely on.
With share prices depressed I would love to see manufacturers like Trina Solar
Read more about these solar stocks by adding them to My Watchlist, which will find all of our Foolish analysis on your favorite stocks.