Why anyone thought Europe was out of the woods is beyond me, but Germany having a difficult time selling its bonds renewed fears of financial collapse again. Yet just because your stock strapped on a rocket pack and went higher, resist the urge to high-five everyone in the cubicles next to you. Smart investors won't celebrate until they know that upward leap was justified. Without a fundamental basis for the bounce, these stocks can quickly make the return trip down.
Is now the time to lock in profits, or is this just the first step toward even higher valuations down the road? Let's examine several stocks that just hit the afterburners and see whether they're truly headed into orbit.
CAPS Rating(out of 5)
Yingli Green Energy (NYS: YGE)
JinkoSolar (NYS: JKS)
China XD Plastics (NAS: CXDC)
With the markets falling 236 points on Wednesday, or 2.1%, stocks that went appreciably higher are pretty big deals.
Shining a light on growth
I'm not sure I can buy into the optimism the markets expressed with Yingli Green Energy because I see a lot of risk and danger bubbling under the surface. The main reason for Wednesday's jump was the company's report of better than expected revenues for the quarter and a surprise profit, beating out other solar shops like Suntech Power (NYS: STP) and JA Solar (NAS: JASO) , both of which reported higher revenues but a wider than expected losses.
Maybe that was partly behind Yingli's bold comments that it expects to grab 30% of the Chinese market for its solar energy technology. With the solar panel market expected to hit 3,000 megawatts next year, it expects to be able to boost its share from the current 25% it owns. Moreover, if it turns cash-flow positive by the first quarter, it may initiate a buyback plan as well.
The market basically rewarded Chinese solar shares for posting lousy results, catching up Jinko Solar in the euphoria as well. It's notable the CAPS Solar Power sector in overall positive territory yesterday (just barely, though) while the rest of the market fell hard.
That's all well and good, but the malaise affecting the industry and weakening LDK Solar (NYS: LDK) and others should serve as a warning sign. The bruising pricing environment in the business is causing JA Solar to forecast declining shipments next quarter, and Suntech says it's going to be down 20% sequentially. Yingli even had one of its suppliers go bankrupt, causing a $6.6 million bad debt expense.
Its margins collapsed, and while its shipments forecast of 1,580 to 1,630 megawatts is 50% higher than it was last year, it represents a decline from its previous estimate of 1,700 to 1,750 megawatts. I'm not seeing the reason for the sunny disposition.
CAPS All-Stars are just barely supportive of the notion Jinko will be able to beat the markets going forward, though Yingli is seen as a stronger play being vertically integrated and not so dependent upon others for its subsistence. More than 95% of the All-Stars see it outperform the broad indexes.
A source of inspiration
China XD Plastics is another stock moving higher for no discernable reason, or despite reasons to the contrary. The company makes plastics used primarily in the auto industry and last month it said it would be restating its financials going back to 2009 to correct a "technical" error it made in calculating earnings per share. The restatement will lower the company's stated profits by more than 13% for 2010 alone. Oops.
Maybe buying into the "non-cash charge" idea helps soften the blow, but the auto industry in China is starting to slow down, and analysts are expecting the market there to stagnate. Car sales rose just 1.4% in October, giving it a 5.9% year-to-date increase. It's not expected to rise much more than that for the rest of the year, and next year analysts are forecasting a similar growth rate.
That has to be something of a surprise for General Motors (NYS: GM) , who said it's expecting its sales to grow by as much as 10% next year and it expects sales to double by 2015. Apparently it's able to offset the lack of subsidies the Chinese government is no longer handing out to buy cars as well as tighter credit restrictions.
While China XD expects full year revenues to rise by almost 50% this year, it's added new capacity to its operations which, if the auto industry slows as expected, may serve as a drain and squeeze margins. CAPS All-Stars like BuffettJunior1 think we may see China XD blow up as we've seen other small cap RTO stocks do this and the restatement certainly isn't an encouraging sign.
Tell us on the China XD Plastics CAPS page or in the comments section below if you agree, then add it to your watchlist to see whether the auto industry roars ahead.
Going into orbit
It pays to start your own research on these stocks on Motley Fool CAPS, where you can read a company's financial reports, scrutinize key data and charts, and examine the comments your fellow investors have made, all from the stock's CAPS page. Then you can decide for yourself whether your stock's headed for reentry, or off to infinity and beyond.
At the time thisarticle was published Fool contributorRich Dupreyholds no position in any company mentioned.Click hereto see his holdings and a short bio.Motley Fool newsletter serviceshave recommended buying shares of General Motors. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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