I follow quite a lot of companies, so the usefulness of a watchlist to me cannot be overstated. Without my watchlist, I'd be unable to keep up on my favorite sectors and see what's really moving the market. Even worse, I'd be lost when the time came to choose which stock I'm buying or shorting next.
Today is Watchlist Wednesday, so I'm discussing three companies that have crossed my radar in the past week -- and at what point I may consider taking action on these calls with my own money. Keep in mind that these aren't concrete buy or sell recommendations, nor do I guarantee I'll take action on the companies being discussed. What I can promise is that you can follow my real-life transactions through my profile and that I, like everyone else here at The Motley Fool, will continue to hold the integrity of our disclosure policy in the highest regard.
Yingli Green Energy (NYSE:YGE)
Make no mistake about it: You could probably throw a dart at any one of the highflying solar companies and hit gold as a short-seller over the next six months. Solar companies like Yingli Green Energy are flying high after U.S.-based First Solar (NASDAQ:FSLR) finally found the "on" switch in recent months, combining the need for large projects in the U.S. with lower operating costs and stabilizing solar panel prices. Unfortunately for China-based Yingli and many of its peers, First Solar's success has absolutely no benefit to them.
Yingli's big boost yesterday came from a production guidance update that now calls for shipments to drop by 6%-7% in the upcoming quarter from the fourth quarter compared with its previous forecast of a low- to mid-double-digit percentage drop in shipments. While certainly good news, the company didn't budge its gross margin forecast from an already razor thin level of 4%-4.2%. To me this is a clear signal that demand may be improving, but that pricing is weak and there's probably still abundant solar panel supply in China.
Another factor to consider here is that Chinese solar panel makers are going to have a nearly impossible time competing with American solar producers. In a turn of the tables, the United States' tariffs on solar panels are providing more than ample protection for U.S.-based companies like First Solar to market their more efficient panels without worrying about price competition from China-based companies like Yingli. We're seeing businesses and governments choosing efficiency over rock-bottom prices this year, and that trend bodes poorly for the entire Chinese solar industry.
While we're on the subject of potential short-sale opportunities, how can I forget to mention Sony, which has shot dramatically higher over the past two weeks despite a dismal streak that includes eight straight years of losses for its television segment.
Sony's boost has come from two fronts. First, gaming companies are showing signs of life, with new gaming consoles set to debut in the second half of this year -- including the new PlayStation 4. This is shaping up to be one of those "buy the rumor, sell the news" type of events, because console makers are still hostage to an incredibly commoditized business platform.
The other factor sending Sony higher is a proposal offered by activist hedge fund manager Daniel Loeb of Third Point, which outlines a plan to spin off the company's software and entertainment business. While spinoffs are good in that they can help unlock shareholder value by making revenue and earnings visibility easier for investors to understand, I'd be leery of any value creation here, given how dismal TVs have performed and how commoditized the remaining shell of the company would be once the software and entertainment division are spun off.
The truth of the matter is that Sony is in trouble. It's lost nearly all of its competitive advantages, and it's even losing its brand identity. With further losses expected this year, it's a name I'd consider betting against.
Perfect World (UNKNOWN:PWRD.DL)
Sticking with our overseas theme today, Perfect World, a China-based gaming company, looks like it could be ready to make a big move, and it certainly looks like the proper way to play the excitement surrounding the gaming industry.
One reason Perfect World makes sense is the simple fact that China's middle class is relatively new to simple luxuries like being able to purchase and play video games on their consoles or PCs. Because there's still such a large opportunity in China for both middle-class income growth and gaming penetration, the same commoditization concerns that exist in the U.S. really aren't present in the gaming industry in China. This means Perfect World will continue to boast good pricing power and should be able to deliver steady results moving forward.
Another factor to consider is the company's immaculate balance sheet, which boasts close to $250 million in net cash (more than $5 per share). This cash on hand, in addition to the $145 million in free cash flow the company has averaged over the past four years, allows it to focus on R&D without the need to take on any additional debt.
This isn't to say that the gaming industry isn't without its own set of hiccups. However, Perfect World -- and its yield, which is nearing 4% -- looks like a darn good value at these levels, considering the growing promise of gaming in China.
Is my bullishness or bearishness misplaced? Share your thoughts in the comments section below, and consider following my cue by using these links to add these companies to your free, personalized Watchlist to keep up on the latest news with each company: