In bull markets, investors see positives and ignore negatives. They see glass half full rather than half empty. That type of bullish thinking allows many fundamentally dead companies to trade well over intrinsic value.
For much of this year, Suntech Power (NASDAQOTH: STPFQ) was an example of such a phoenomena. The market priced Suntech Power at over $200 million in market capitalization despite horrible fundamentals.
The horrible fundamentals for everyone to see
- Suntech Power's main subsidiary Wuxi Suntech had approximately $1.75 billion in debt and possibly $500 million in assets.
- The company had negative margins and negative growth while peers were seeing margins bottom and growth renewed.
- Suntech Power defaulted on its debt by missing a payment on $541 million in debt in March 2013.
The catalyst that drove Suntech Power to its real value was the agreement to sell Suntech Power's main subsidiary Wuxi Suntech assets to Shungfeng Photovoltaic International for $492 million on November 3 and Suntech Power filing for provisional liquidation on November 6.
After those two events, the market realized that Suntech Power was intrinsically worth a lot less than the $200 million market capitalization. Its shares sold off almost 66% in three days.
Implications for LDK Solar
Suntech Power's bankruptcy is a clear warning to LDK Solar (OTC:LDKYQ) investors. While there is no immediate catalyst to send the stock lower, LDK Solar fundamentals are similarly weak.
- LDK Solar has $2.6 billion in debt.
- The company has gross margins of negative 46% and quarterly year-over-year revenue growth of negative 51%
- Like Suntech Power, LDK Solar defaulted on its debt, missing a payment on $23.8 million in convertible debt that matured on April 15, 2013.
The Chinese government wants solar companies to consolidate, and in my opinion, LDK Solar will be bought out with current shareholders getting little to nothing.
The bottom line
Trying to catch dead cat bounces in bull markets may not be worth it. Even though Suntech Power rallied nearly 40% on November 14, the stock itself is worth little to nothing. After selling off its Wuxi manufacturing assets, Suntech Power shareholders own a company with a lot of debt and a small selling and distributing company. It remains to be seen whether the remaining company will be solvent.
There are much better buys in the solar space. Trina Solar (NYSE: TSL) is up 519% year to date. The company is one of the sector leaders with growing operating margins. Its average selling prices have stabilized. Trina Solar is currently fully utilized and rumored to increase megawatt production capacity next year.
Due to falling costs and increasing demand, the solar sector is poised to grow. With the electric utility market numbering in the hundreds of billions of dollars a year, growth could continue for a long time.
Like many other sectors, solar sector leaders will benefit greatly while the laggards may struggle. Investors should consider investing in sector leaders such as Trina Solar and avoid laggards such as Suntech Power and LDK Solar.