The Stock That Had Me Convinced I Was Stupid (Part 1)

Last update on June 10, 2013.

CC Image courtesy of russf

"In the short run, the market is a voting machine but in the long run it is a weighing machine." - Benjamin Graham

In this podcast, I will talk about my experience investing in First Solar (Ticker: FSLR). I will talk about why I first chose to invest in it, why that made me feel stupid for a time, and finally, how it all ended for me.

 

 

Transcript

Hello, and welcome to the MoneyGeek podcast. My name is Jin Choi, and today, I want to talk my experience investing in a company called First Solar. As you'll see, it was quite the roller coster ride.

Before I begin, I want to talk a little bit about my investing philosophy. Certainly if you read other blogs, or perhaps listen to some of the other financial advisors out there, you'll notice that there's a few different schools of thought when it comes to investing.

There's the passive investment school that says the markets are efficient, and since it is, no one should ever try to pick stocks. Doing so is nothing more than gambling. For those who subscribe to this view, what I do will seem like blasphemy.

However, I don't subscribe to that view at all, and you can read about why, in my 'debunking the markets are efficient myth' series. On the contrary, I belong to the value investor camp, which famous investors like Warren Buffett and Benjamin Graham belong to. I will go into more detail about my investing philosophy in another series.

Anyways, let's talk about First Solar.

I first looked into First Solar around 2008, when its stock was trading at close to $300. At the time, I was still pretty new to investing, so I was susceptible to one of the classic mistakes that new investors make, which is investing in 'hot' industries. Back then, renewable energy was a red hot industry, and First Solar was the darling of them all.

First Solar was, and still is, different from most other solar panel companies like SunPower or Suntech. First Solar produces so-called 'thin film' solar cells, which are different from 'polysilicon' solar cells. While they both do the same job, which is to turn solar energy into electricity, their costs and efficiencies are different. While polysilicon cells convert more of the available solar energy into electricity, thin film cells have been cheaper to produce, even with a lower efficiency. If you look at price per watt, First Solar had the advantage.

Because of this, First Solar enjoyed higher profit margins. Wall Street noticed, and they bid the stock up. At $300/share, the company was worth some $25 billion dollars. It's price to earnings ratio was around 40. For those of you don't know, the price to earnings ratio is a very basic value metric. I don't want to go into detail about this right now, but all you need know right now, is that the higher the price to earnings ratio, the more expensive the stock.

Even then, I understood that the stock was expensive, so I passed on it.

4 years passed by, and during that time, the stock went from $300, to just just $30 a share in 2012. There were a few reasons for this.

1. Europe cutting back. A great amount of demand for solar panels came from Europe. You see, countries like Germany and Italy really wanted to encourage renewable energy, so they gave a lot of incentive for people to build solar panels.

The incentives were so big, that some Germans took lamps and shone it towards their solar panels to make extra money.

When the financial crisis came, these European countries realized that they needed to cut back on their spending. One of the first things that got cut were subsidies on renewable energy. So you had this massive demand for solar panels from Europe, that was going to disappear in just a couple of years. That was reason #1.

2. Chinese solar companies like Suntech, JA, and Trina began cutting prices drastically. Partly, they cut because of reason #1, where they saw demand dropping. But as American and European solar companies are pointing out, there is a more sinister motive.

China wants a monopoly on solar panels.

Since they knew that renewable energy was the future, they gave their own companies large subsidies, so that those companies could flood the market with cheap solar cells, and force the other solar companies out of business. So China is reason #2.

3. The shale boom. Now, I plan on writing about the shale boom in a separate series. But for now, let me just say that this process called 'fracking', which you may have heard, unlocked a vast amount of natural gas here in North America. That plunged natural gas prices, so that in 2012, it was cheaper for many utilities to build and run natural gas plants, than any other type of power plant, including solar.

Between these three reasons, investors just couldn't see any reason to own solar stocks. That's why they dumped First Solar, even though the company was still profitable, and even though it had a healthy balance sheet. At $30 per share, the company was trading at below book value, which means that if they could theoretically sell all their assets at the prices recorded on their books, and pay off all their obligations, the company would be worth more than $30 per share that was trading at. To put it simply, the company was worth more dead than alive, though I admit I'm oversimplifying matters here.

But there was one silver lining to this story that made me jump in and buy First Solar stock. Unfortunately, it looks like time is running out for me, so I'm going to have to stop there. In part 2, I'll explain just why I bought First Solar, and how the investment turned out. So stay tuned, and I hope you can join me back for part 2. Have a great day.

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