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JakilaTheHun (99.92)

Seven Stock Ideas for the Impending Apocalypse: Part Two



October 15, 2008 – Comments (0) | RELATED TICKERS: ESLRQ.DL , CHK , ZOLT.DL

4. Evergreen Solar (ESLR)

Poor beaten-down Evergreen Solar; you almost have to feel sorry for them.  While companies like First Solar (FSLR), Energy Conversion Devices (ENER), and even Chinese solar manufacturers like Canadian Solar (CSIQ) shot up during the past few years, Evergreen has been the ignored stepchild of solar. 

Perhaps people are overlooking something --- such as maybe a $3 BILLION backlog!  That’s right, a $3 BILLION backlog!  To put that in perspective, in their most recent quarter, they had revenues of $23 million in their most recent quarter  Multiply that by four to get a rough estimate of yearly revenues, and that ends up being about 32 times that number!

Of course, this company looks like it’s underperforming if you look at their income statement.  They lost eight cents per share last quarter and broke even the quarter before.  Who’d want to buy into a company with no profits, right?  Unless of course, that company was simply breaking even due to their currently low manufacturing capacity and they were massively upgrading their capacity and they had a certain technology that gave them an advantage over their competitors and they had a $3 billion backlog and they had an equity interest in a sister company that was doing similar things.  That might change things a bit, right? 

Evergreen recently added 80 MW of capacity in a new facility in Devins, MA.  Around the end of 2009, they plan to expand this upgrade so that they have 160 additional MW of capacity online.  Compare that to their current capacity of 15 MW.  They have additional plans for expansion and they hope to expand all the way to 850 MW at some point in the future.  Of course, all this would be for naught if they didn’t have the sells, but with their current backlog, that does not seem to be a problem.

Assuming that Evergreen can slightly improve their margins as greater efficiencies are realized, they could earn anywhere from 15 to 20 cents per share each quarter; even if you play it conservatively and estimate they make roughly 60 cents per share for the year; at a P/E of 10, that would justify a price of $6.  That’s just after the first upgrade.  Potentially, this company could earn profits of a few dollars per share with 3-4 years and right now, it’s only selling for about $4 per share.  Of course, if there is excess capacity in the industry for awhile, as Goldman Sachs recently predicted, revenues could decline and put a dent in that, so it’s not a sure bet, but nothing ever is in the market.  It is worth mentioning that the U.S. government recently extended and expanded the solar tax credits.  Plus, crystalline silicon prices will probably decline over the next few years, which might help ease any margin pressure.   

The good news is that the book value of ESLR’s equity is around $4.2 per share and the stock is actually selling for less than that! They have a working capital ratio of 2.6 and even if we discount their "restricted cash", they have a quick ratio of 1.6. If I go a step further and factor in their slightly negative cash flows from operations, we still end up with a 1.24 ratio. Total debt-to-value is 30%, so they look to be in fairly solid financial shape and at less than book value for a company for huge potential, that doesn’t seem so bad. 

5. Chesapeake Energy (CHK)

Talk about a bad week, Chesapeake CEO Aubrey K. McClendon got a margin call and had to sell off his entire stake in CHK.  It couldn’t have come at a worse time given that the stock already looked a bit undervalued.  Now, it’s trading in the $17 range, despite a brief jump during the early week rally.

CHK's stock has plummeted even faster than the rest of the market. They were trading at about $70 three months ago and recently dipped below $14. That's a huge drop and only partially explained by the aforementioned margin call. The overall market is still in a panic and downgrading everything down below book values. CHK is particularly susceptible to the current fears because they have a lot of leverage --- a 73% debt to value ratio and 0.44 working capital ratio are very scary! Additionally, CHK has absolutely no cash on its balance sheet!!!

However, the problem with only using those metrics is that a company can be raking in significant cash flows from operations and Chesapeake seems to be in better shape on that front.  One might also consider that natural gas seems to be a very good investment right now, with demand likely on the rise.   Then, there’s also the fact that the book value of CHK’s equity is 18.85, they have very valuable assets, and they are operating profitably; and yet, they are trading at a discount! 

Earnings forecasts look good. The consensus is around $3.89 per share for FY '08 and $4.14 for FY '09.  Cash flows from operations are strong. I calculated $5.28 per share for the previous quarter!!! While they were cash flow neutral for that quarter, it was largely due to spending on investments, which is probably a good thing.

Overall, even with all of the negative, I'm looking at this as a lower-risk opportunity than it would normally be. Worst case scenario --- their assets are worth more than what they are trading at! They are raking in cash flows from their operations, have significant earnings potential right now, and appear to be in a very good industry at the right time.  

6. Titanium Metals (TIE)

The first thing to like about Titanium Metals is that they manufacture titanium (as you were probably able to ascertain).  The outlook for the metal looks fairly good for the future.  The second reason to like TIE is that they are profitable, have decent cash flows, and they are selling only slightly above the book value of their equity.  The third reason to like TIE is that insiders are buying into this thing like there’s no tomorrow!  So we’ve got a company with some potential high-growth in the next few years, selling fairly cheap, and everyone familiar with the operations seems confident enough it to believe the stock could create some good returns.   Admittedly, my knowledge about the titanium is somewhat limited, but that sounds like a good formula. 

7. Zoltek (ZOLT)

Hi, I’m Troy McClure.  You might remember me from previous bullish articles on low-cost carbon fiber manufacturer Zoltek, such as “How I Learned to Stop Worrying and Love the ZOLT!” 

In my prior article, I wrote about Zoltek’s strong margins and how I liked their market position.  Given the fact that ZOLT has been profitable in recent times, it’s sort of strange to seem now trading around the book value of their equity:  $11.07 per share.  ZOLT has dipped down below $8 for a short time and seems to have leveled off around $10-11.  That’s not a bad price for a company with growth potential as huge as Zoltek. 

There are, to be sure, some risks.  For one, while there’s no evidence for vast demand destruction for Zoltek’s products, there does appear to be lowered demand for higher-cost carbon fiber that companies such as Hexcel (HXL) sell to the aircraft industry.  The problem with this is that it’s possible that those companies could start dumping their carbon fiber at cheaper prices, somewhat undermining Zoltek’s margins.  However, this might be more a short-term problem and I wouldn’t recommend ZOLT to anyone but a long-term investor.  The real potential for this company is at least two to three years down the road after capacity upgrades.   It’s not a certain bet, but below the book value of their equity, the risks end up being substantially downgraded and there could be a very big reward at the end. 

The Aftermath

Hopefully, that apocalypse is delayed for at least another decade and you can buy into some stocks to be had at a discount right now.  As my last article on historic post-market crash returns suggested, if you buy when the market is at the bottom, you can make a very sizable return if you stay in for the long-term. 

I can’t say for certain that we’ve bottomed out, but there are many companies out there that look very cheap right now one way or another.   Hopefully, my seven suggestions might help you onto the right track or give you a little extra insight into companies you were already looking at.  Maybe ten years from now, we’ll all have some pretty decent returns.  Or maybe that apocalypse will have come and it won’t even matter.

Disclosure:  I am long on PAL, SWC, and ESLR.

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