Economist are used to think that markets are rational, but there is so much evidence out there that they are anything but rational. Take Trina Solar (TSL). We have thought it’s cheap for quite some time. The stock price has gone through wild gyrations.
It sold of with the sector in the first six weeks of this year, in an incredible way. It then produced absolutely bumper results for the last quarter of 2007, and it became pretty clear that 2008 was going to be a break-out year, because those same forces that produced the stellar fourth quarter of 2007 would continue to propel it higher in 2008, rapidly increasing production capacity.
It rallied for a day or two after those stellar earnings were made public, but then it sold off again, to reach a low at 27, pretty ridiculous in our view as that price implies a 2008 p/e way below 10, and that for a company which is growing not at double digit speed, but at triple digit speed.
It only took one renowned analyst to trumpet that same view to change things around with speed. Friday, TSL rallied on that call from Cowan, who argued that 2008 earnings would be above $4 a share. That rally continues with force this morning now that the remaining element that was bugging it down has been removed.
Trina was originally planning to produce it’s own polysilicon plant. Not a good idea, for two reasons. First, costing upwards of $1B, financing it would dilute the number of outstanding shares considerably (although they wanted to finance the first part with debt), and second, the plant would start producing just when there would be a glut in polysilicon due to many new plants becoming operative.
The markets didn’t like the idea, and they finally came to their senses. Now it’s the turn of the markets to come to their senses about Trina Solar. So far, they seem to be keeping their part of the bargain. We think TSL has a free run towards it’s 200 day average at 47 if the markets do not sell off in any major way.
Breaking that 200 day average might be difficult though. Today’s markets are just too unforgiving, and TSL will be overbought when it reaches 47, so a pause would seem in order then.