For at least a couple of decades, I’ve been intrigued by an investment philosophy that dovetails with eco-friendly initiatives to take better care of our planet. “Going green” is a catchphrase that we’re all pretty familiar with in one form or another. Whether that means separating the trash in your home between recycling bins, driving an electric or hybrid car, or any number of other methods, there are a lot of things each of us can do to be more responsible stewards of the resources the world has to offer.
This eco-friendly mindset even carries over into the stock market, where some investors like to combine other investing strategies. I like to focus my investments on fundamentally strong, bargain-priced stocks. If I add a socially conscious filter to my screening process, I can narrow the volume of stocks that I might consider for my investments quite a bit – not necessarily to just those companies that are easy to identify as eco-friendly, but also to those whose businesses might not be necessarily appear eco-friendly, but who might be working to initiate positive, socially conscious changes in their organizations.
One way that we as consumers can dramatically lessen our carbon footprint is to change the way we use electricity. Instead of relying on traditional delivery methods, which rely heavily on fossil fuels like coal and oil, which are a finite, declining resource, adopting technologies that harvest and produce electricity from solar, or even wind power are a good example of what I mean. If that is an approach that appeals to you as a consumer, it might also make sense to look for stocks that produce the technologies that make it possible. Canadian Solar Inc. (CSIQ) is a good example of one of these kinds of stocks. Are they a good buy right now? Let’s take a look.
Fundamental and Value Profile
Canadian Solar Inc. is a solar power company. The Company is a provider of solar power products, services and system solutions with operations in North America, South America, Europe, Africa, the Middle East, Australia and Asia. Its segments include module segment, energy development segment and electricity generation segment. It designs, develops and manufactures solar wafers, solar cells and solar power products. The module segment primarily involves the design, development, manufacturing and sale of a range of solar power products, including standard solar modules and specialty solar products, and solar system kits. Its energy development segment consists of solar power project development, engineering, procurement and construction services, and operation and maintenance services. Its electricity generation segment consists of holding solar power projects for the purpose of generating income from the sale of electricity to the local or national grid or other power purchasers. CSIQ has a current market cap of about $1.1 billion.
Earnings and Sales Growth: Over the last twelve months, earnings have increased impressively, at nearly 60%, while revenues dropped by about -19%. In the last quarter, both numbers were positive, as earnings increased a little over 67% while sales rose about 17%. Increasing earnings faster than sales is hard to do, and generally isn’t sustainable in the long-term, but it is also a positive mark of management’s ability to maximize business operations. The company margin profile is also improving, with Net Income as a percentage of Revenues increasing from 6.3% over the last twelve months to 12.38% in the last quarter.
Free Cash Flow: CSIQ’s free cash flow was modest, at just $22 million over the last twelve months that translates to a minimal Free Cash Flow Yield of 2%.
Debt/Equity: CSIQ has significantly less long-term debt than they do cash and liquid assets, which is pretty rare. In the last quarter, cash was about $930 million, which long-term debt was was just a little over $393.61 million. That gives the company excellent liquidity; when you consider their improving operating margins, this is also a strong indication not only that they can service their debt without a problem, but also that they have plenty of flexibility with which to look for aggressive ways to expand their business.
Dividend: As with most stocks in in the Technology sector, CSIQ does not pay a dividend.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for CSIQ is $20.72 and translates to a Price/Book ratio of .9 at the stock’s current price. Considering that the stock’s historical average Price/Book ratio is 1.34, you can put a long-term target price for the stock at around $28 per share.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The red diagonal line measures the length of the stock’s upward trend from June of last year to the end of February; it also informs the Fibonacci trend retracement lines shown on the right side of the chart. The stock’s increase from a little above $11 to its peak last month at nearly $26 is impressive, but the stock has been dropping from that point, with a particular decline in just the last couple of days that is being attributed primarily to forward guidance management gave for revenue in 2020 that was markedly less than analysts had been expecting. The stock is sitting right on the 50% retracement line right now, but whether that line will act as support to give the stock a place to stabilize remains to be seen. I see more likely support between $17, around the 61.8% retracement line and $18. A break below $17 should give the stock room to keep dropping down to the 88.6% retracement line around $13.
Near-term Keys: If you’re looking for a bullish short-term trade, you should wait right now to see if the stock can stabilize and find support to turn back higher. The best bullish signal to buy call options or use the stock outright for a short-term trade would come from a break above the 38.2% retracement line, to about $20.50. In that case, look for an exit point between $23 and $24 per share. Given the stock’s current bearish momentum, I don’t expect the 50% retracement line to provide much support; if the stock breaks below $17, consider shorting the stock or buying put options with a target price around $13. The stock’s fundamentals are mostly solid, which is very encouraging, and the value proposition right now is pretty attractive; but I also think that a smart value investor should be patient right now and wait for the stock to actually stabilize before looking for an entry point. I think that wherever that stabilization point comes, it is going to offer an even better value opportunity than the stock is showing right now.