It’s a Small Cap World (for Now) – Russell 2000 Index Up nearly 18 Percent for Year

Graphic courtesy of Russell Investments

 

The stock market finally “took a breather” on Monday of this week, as the Wall Street Journal characterized it. The resilient bull market of 2013 has seen only four sessions in May that had a decline in the Standard & Poor’s 500-stock index and Monday was one of them. This year’s bull market rally has recently been across the board–Asian markets have been up, European markets turned up, and market watchers are anxiously waiting for tomorrow, Wednesday, May 22, when Federal Reserve Chairman Ben Bernanke is scheduled to testify to Congress and the Fed releases the minutes from its last public policy-setting meeting. Will Bernanke offer up any clues about his next steps?

Most importantly for Smallcap World, the Russell 2000 index, which tracks the performance of smallcap U.S. equities, climbed above the 1,000 level for the first time Monday, a metric that MarketWatch considers “psychologically important” for smallcap stocks. As of Monday morning, May 20, the Russell 2000 was up 17.9 percent for the year-to-date, according to FactSet (The Associated Press reported the Russell 2000 up 17.5 percent for the year).

The conventional wisdom is that small caps stock are doing well because they are more U.S. focused than the large caps, which tend to be multi-national. And the U.S. economy is recovering as opposed to other economies around the world. But many large caps are doing well, too,

You don’t have to look far to find small cap stocks at 52-week highs, even “all time highs.” Of course the question always is, how much higher can these stocks go? Buy now or wait for the correction that so many experts have been predicting is right around the corner for months now?

We’ve selected a few stocks we know are at all-time or 52-week highs, and others we’ve covered lately that seem to be on the upswing.

Calabasas, CA-based National Technical Systems * (Nasdaq: NTSC, http://www.nts.com/) is a relatively unknown smallcap stock but also the world’s largest independent engineering services and testing company. It’s biggest markets include aerospace and defense, but also works in the automotive and telecommunications markets, among others. NTSC closed at an all-time high of $13.09, up 94 cents on May 21, with a market cap now of about $150 million. NTSC is lightly traded, only about 7,500 shares a day, although that is trending up. 

Northville, MI-based Gentherm * Incorporated (Nasdaq: THRM, http://www.gentherm.com/) is a global developer and marketer of thermal management technologies for a broad range of heating and cooling and temperature control technologies. Best known for its Climate Control Seat systems that actively heat and cool seats in more than 50 vehicles made by the world’s leading automobile manufacturers, Gentherm (formerly called Amerigon) has branched out into heated and cooled bedding systems, cupholders, storage bins and office chairs. THRM also reached a 52-week high of more than $18 this week, then closed May 20 at $17.78, down 33 cents for the day. Its market cap is now $594 million. As recently as last July THRM was trading at just above $10.

We recently featured Cincinnati-based LSI Industries (Nasdaq: LYTS, http://www.lsi-industries.com/) , a company that offers a different take on an LED lighting company. LYTS creates LED video screens and LED specialty lighting for sports stadiums and arenas, digital billboards and entertainment companies. It closed April 29 at $7.09 with a market cap of $170 million. LYTS closed May 21 at $8, up 1 cent for the day, with a market cap now of $192 million.

Analysts at CRT Capital recently upgraded Atlanta-based Beazer Homes USA (NYSE: BZH, http://www.beazer.com/), a company that builds and sells single-family and multiple-family homes in 16 states in the U.S., to a “Buy” with a $29 price target. BZH also acquires, improves and rents homes. The company operates through commissioned home sales counselors and independent brokers. As recently as last Sept. 14 BZH was trading for $3.77. It closed March 20 at $16.86 with a market cap of $410 million. BZH closed May 21 at $21.75, down 98 cents for the day. Its market cap is now $538 million.

San Jose, CA-based SunPower Corp. (Nasdaq: SPWR, http://www.sunpowercorp.com/), like many solar stocks, have been on the upswing lately. SPWR closed May 8 at $15.36, down 6 cents for the day, with a market cap of $1.8 billion. It closed May 21 at $21, down $1.70 for the day but got up to $23.76 just last week. Its 52-week trading range is now $3.71-$23.76.

Fremont, CA-based Procera Networks (Nasdaq: PKT, http://www.proceranetworks.com/) works with mobile and broadband network operators providing intelligent policy enforcement solutions for managing private networks. PKT’s products are sold under the PacketLogic brand name to more than 600 customers in North America, Europe and Asia. PKT’s 52-week trading range is $10.12-$25.99. At mid-day May 2 it was trading at $11.22, with a market cap of $229 million. At market close May 21 PKT was trading at $13.89, down 3 cents for the day, with a market cap of $282 million.

* Denotes client of Allen & Caron Inc., publisher of this blog.

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Q/A with Philip Lawes, Founder and President of Insoltech Solar

Philip Lawes, founder and president of Laguna Beach, CA-based Insoltech Solar, has been in the solar power business for 34 years. He is a designer and consultant for renewable power systems such as solar photovoltaic systems. Although based in Southern California, Lawes has installed renewable energy systems in various parts of the world including the Caribbean, Mexico and the South Pacific, as well as in the California desert areas.

Smallcapworld: How did you get into the solar business way back in the 1970s and what was your first solar job?

Solar farm photo courtesy KCOY.comChannel 12

Lawes: It was a solar hot water system. That’s all there was back then in the late 1970s that was financially viable. Solar power has been around for a long time. The photovoltaic cell was developed by Bell Labs and the first applications were for space and to power communications satellites. But it really kicked off during the second energy crisis in 1978. Saudi Arabia basically cut off all our oil and gas prices skyrocketed. Remember the long lines and high gas prices? There was an “energy crisis” and everyone started looking for alternative energy sources. President Carter helped boost the solar business by creating large financial incentives through generous tax breaks.

Q: Which companies were making the solar panels back then?

A: A lot of companies got into it, but they were mostly small companies, many based in Europe, making solar thermal collectors. It was mostly about heating water to reduce natural gas bills and in some cases electric bills, if you had electric heating.

Q: When did you get into photovoltaics?

That would be in the 1980s. I did a lot of work in Baja California, in and around Cabo San Lucas. I worked for expats in the area, for their small palapas and for pumping water on their ranches, for their cattle or other needs. The idea was to generate electricity in remote areas where utility power was not available and the cost to run diesel-powered generators was prohibitive.

Q: Tell us about some of your other projects.

A: I built a solar electric system for a small resort called Papageno in Fiji. Just a few years ago I also designed and built a solar electric system for Johnny Depp for his private island in the Bahamas. I was also a subcontractor for a 1.3 million watt system for the Twenty-Nine Palms Marine Corps base in the California desert. And I built a small solar energy water pumping system for the Irvine Company here in Southern California to provide water for an endangered species. We are working on a custom home in Shady Canyon now, an exclusive area of the Irvine Ranch.

Q: There are many different types of solar arrays now available. Which are best for the average homeowner?

A: The typicial, flat-plate, mono- or poly-crystalline solar modules are still the workhorses of the industry. They are scalable, maintenance free and offer excellent warantees and still the best route for average homeowners. Thin film modules are not as efficient so they require more area. And companies are still having problems getting the manufacturing process down. People got into thin film because they thought they could manufacture them cheaply but that hasn’t really happened yet. And no one anticipated that the standard modules would come down in price so much.

Q: Are there American companies that are able to compete with the Chinese in the manufacture of solar modules?

A: Oh sure. FirstSolar is a thin film manufactuer, the only really successful thin film manufacturer. SunPower is an American company and has a very efficient module built with great technology but they manufacture offshore, primarily in the Phillipines. Helios is based in Wisconsin and has been successful making solar modules. But there has been, and will continue to be, lots of attrition. Some companies are even selling their modules at a loss.

Q: Why do some companies like Helios succeed, while others like Evergreen Solar and Solyndra fail?

A: Solyndra stepped out of the box and tried a very different approach and ultimately had too many problems. Their idea was to build little glass cylinders with thin film cells inside. They were light weight and didn’t require ballasting, but I believe they had a lot of breakage and lots of other problems in production. Ultimately, they didn’t anticipate the dramatic decrease in price of today’s standard workhorse mono- and poly-crystalline modules. Evergreen had a different approach, called ribbon technology. My take is that they couldn’t approve on the efficiency of the modules enough, couldn’t get enough volume going and couldn’t compete with the big guys from China and Germany. Helios is successful so far, but who knows, we could read tomorrow that they are in trouble. But they do provide the old standard modules people want and a lot of people just want to buy American only, which helps them. I think SunPower makes the highest efficiency module of all.

Q: You say you helped do an installation at a Marine base. Why is the military getting into solar?

A: There have been mandates from the Department of Defense, one of the largest if not the largest user of electricity in the country, and they are looking for ways to do things cheaper.  In many cases these military installations are out in the middle of nowhere and it’s a cheaper alternative than using diesel generators. They also want to be autonomous, and have security. That’s why they are also looking at biofuels. They want to use stuff we grow ourselves instead of relying on outside sources. 

Q: How is solar power progressing in other countries, like the emerging parts of the world?

A: The emerging nations are finally beginning to grasp the value of renewable energy. Cuba has lots of solar, so do the Virgin Islands, and Hawaii as well because they have to import their fuel. Many parts of the world don’t have coal, natural gas or hyro power. It’s all about diesel-fired generators. It’s all about what they call grid parity. That’s the holy grail. If you can product power at a lesser cost than what they charge. Grid parity is now in places like the Bahamas, but it all depends on the particular area.

Q: How long does it take the average residential installation to pay for itself in terms of decreased or eliminating energy bills?

That really depends on your location. There are so many variables like which utility is in the area and what the rates are and what rebate programs they offer. In Southern California, with large homes and large usage like the tier 4 and tier 5 users, it’s about 5-7 years. But in places like Hawaii that doesn’t have coal-powered plants or hydro and electricity is very expensive, but there’s plenty of sun, the payback can be quicker.

Q: What are the chief maintenance problems with a home system? Do you need to have special insurance to cover the installation on the roof?

My main expertise here is California, which doesn’t have extra insurance, in fact they make it mandatory to not charge extra insurance. But as California goes, so goes the rest of the country, typically. The chief maintenance problem is keeping the modules clean. Again, that depends on where you live. Actually, it’s easier on the East Coast where they get more rain. In California, where it can go months without rain, it can be difficult to keep them clean, particularly if you live near a construction area that is generating lots of dust. It’s good to wash them every few months. Have a window washer do it if you can.

Solar Stock Winners Hard to Find following Tariff News on Chinese Solar Panels

For the U.S.-based solar power industry, the news on May 17 was what many panel manufacturers had been looking for: the U.S. Commerce Department announced it was slapping a high tariff on solar panels from China (http://www.nytimes.com/2012/05/18/business/energy-environment/us-slaps-tariffs-on-chinese-solar-panels.html?ref=business).

While it was certain to “infuriate” Chinese officials, according to the New York Times, just how good the news was for the industry was hard to tell. More importantly for our blog, what does this decision to impose antidumping tariffs of more than 31 percent on solar panels from China mean for solar stocks? Based on the early reactions of the stock market and the fact that the overall market has been hit so hard in recent days, the results are difficult to read.

First, however, some of the fine print. This is a preliminary decision , not set in stone, and it won’t actually go into effect until October, if at all. There is some talk that it would be retroactive to February 2012, however.

Second, solar panel manufacturers based in Taiwan, like AU Optronics Corp., which has become a big player in the thin film solar panel business, won’t be affected. Third, some of the Chinese manufacturers like Trina Solar (which has moved its manufacturing outside of China and won’t be affected) and Yingli announced that their retail prices would not be affected by the tariff. So it will be interesting to watch what the Commerce Department actually does, what it all actually means and how the market reacts.

In the meantime, here are how some randomly chosen solar stocks closed on Friday, May 18, a day after the news broke. If there were real winners, like U.S.-based First Solar and SunPower, it was hard to tell by stock price.  Most of the China-based companies took an initial hit, but then stabilized.

Tempe, AZ-based First Solar (Nasdaq: FSLR, http://www.firstsolar.com), which specializes in thin-film solar modules, continues a drastic slide that began a year ago. Many insiders say their costs are  just too high and margins too low to stop the decline. FSLR, which traded as high as $142 last summer, has fallen all the way down to small cap territory. It closed May 18 at $13.66, down $1.26 for the day. It’s market cap is only $1.2 billion.

Ontario, Canada-based Canadian Solar (Nasdaq: CSIQ, http://www.canadian-solar.com ), which sells a variety of solar products, has seen its stock price stabilize since December. Last summer CSIQ traded for over $12 but by late August it had dropped to about $6.75. It closed May 18 at $2.70, down 25 cents on the day. Market cap is now $117 million.

San Jose, CA-based SunPower Corp. (Nasdaq: SPWR, http://www.sunpowercorp.com) makes a wide variety of solar products and systems. Like the rest of the industry, SPWR stock is now trading near the bottom of its 52-week range ($4.94-$23.36) and its market cap has dropped to $601 million. SPWR closed May 18 at $5.08, down 51 cents on the day.

China-based Suntech Power Holdings (NYSE: STP, http://www.suntech-power.com/), makes photovoltaic products and provides construction services. STP stock tanked on the news, tried to rally back briefly early in the day May 18, but ultimately closed at $2.00, down 13 cents on the day.

China-based LDK Solar Co. (NYSE: LDK, http://www.ldksolar.com/)) manufactures solar products and silicon materials. LDK, which was trading for nearly $5 in late December, closed May 18 at $2.85, down 6 cents on the day. Its 52-week range is $2.54-$7.90 and its market cap is $373 million.

China-based Trina Solar Ltd. (NYSE: TSL, http://www.trinasolar.com/)) designs, manufactures and sells photovoltaic modules worldwide. It has a chart similar to many of the other solar stocks, which reached highs last summer but have been sliding for the most part since. It closed last Aug. 31 at $15.88 and by Dec. 23 it had dropped to $7.39. It closed May 18 at $5.70, down 38 cents on the day. Market cap is now $464 million.

China-based Yingli Green Energy Holding Co. (NYSE: YGE, http://www.yinglisolar.com) makes photovoltaic products including cells, modules and systems. YGE’s 52-week range of $2.75-$9.85 and its market cap is now $396 million. Like most of the other solar stocks, its best days were last summer. It closed May 18 at $2.52, down 28 cents on the day.

Is a Solar Shakeout on the Horizon?

Barron’s weighed in again March 14 on the outlook for solar stocks, and the news in most cases is not good. Under the headline “Should Solar Bulls Be Such Grumps?,” writer Tiernan Ray suggests that given the surging price of oil and the better-than-expected year-end results turned in by most solar companies, one might expect stock prices to be rising. But that’s not the case for the majority of the pack, other than the two best performers, First Solar and SunPower. With a $1.32 billion market cap, SunPower is just outside our $1 billion ceiling for smallcap stocks and of course First Solar is a solar giant with a more than $12 billion market cap.

For investors, the problems with solar stocks seem to be oversupply and the outlook for government subsidies in our current belt-tightening times. With governments all over the world ratcheting back, investors are concerned that those subsidies, which the young industry has relied on, will be among the cuts. Ray, however, suggests that might ultimately be a good thing. A global solar industry shakeout might help separate the good companies from the bad, he says.

Herb Greenberg of CNBC agrees. While solar stocks were “on fire” March 14 in the wake of the Japanese disaster and “headlines about nuclear uncertainties,” Greenberg and solar bear Gordon Johnson of Axiom Capital also warned about the expected cuts in solar subsidies. Japan had been expected to offset solar declines in Italy and France, but that may not occur given the serious issues related to the earthquake and tsunami.

Here are a few of the solar stocks we have been watching lately:

China-based JA Solar Holdings (Nasdaq:JASO, http://www.jasolar.com/) is a photovoltaic solar cell manufacturer that was up more than 6 percent March 14 on the Japan news to $6.69 but started to back off in after hours trading. JASO, with a market cap of about $1 billion, has been as high as $10.24 in the past 12 months but was one of several solar stocks downgraded by Piper-Jaffray, due in large part to concerns about future subsidies.

Marlboro, MA-based Evergreen Solar (Nasdaq: ESLR, http://www.evergreensolar.com/) uses its proprietary wafer manufacturing technology in its String Ribbon solar panels. ESLR has been struggling and, as noted in Barron’s, it has never made a profit and is facing a cash crunch, which prompted a recent sell rating from JP Morgan. The stock traded for more than $7.50 a year ago but has been on a downward slide ever since, closing March 14 at $1.68 a share.

The MAC Solar Energy Index (NYSEarca:TAN) is made up of common stocks, ADRs and GDRs and on March 14 had net assets of $188 million. As Greenberg notes, it was one of the solar stocks enjoying a run March 14 on the Japanese news but had fallen nearly 20 percent in recent weeks.

Ontario-based Canadian Solar (Nasdaq:CSIQ, http://www.canadian-solar.com/) manufactures and markets solar cells and solar module products in Canada and interntionally. CSIQ, which has a market cap of $461 million, was one of the “downstream” solar stocks hit by the Piper-Jaffray downgrade and it dropped 2.7 percent to $10.75 March 14. The stock has traded for as high as $26.26 in the past 12 months but is off its 12-month low of $8.99.

A Quick Glance at Some Solar Companies — SPIR’s “Come to America” Leads the News

Renewable energy of all types is in the middle of a Gold Rush, with the Mother Lode being at the top of Pennsylvania Avenue.  Some aspects of renewable energy have a magic formula in that they can (a) generate energy independent of oil, (b) create jobs with “shovel-ready” projects, and (c) command very attractive financing, possibly with federal underwriting or guarantees.

Typical of a Gold Rush, there are crowds of people out there with pans working the streams and shovels digging holes.  And that can create a enough cross-currents and environmental noise that it can be difficult to tell who’s on first.  The biggest area of renewable energy right now is probably still solar energy, so let’s have a quick look at some recent comments, and some companies with interesting potentials.

Leading the solar news this morning is a fascinating piece from Bedford, MA-based Spire Corporation (Nasdaq: SPIR, http://www.spirecorp.com/), which announced a “Come to America” program of their own devising.  Not surprisingly, they realized that if they can lure foreign companies to the US to build solar-energy devices, those foreign companies can apply for what SPIR calls “full advantage of the newly signed economic stimulus bill.” http://finance.yahoo.com/news/Spire-Initiates-Come-to-bw-14410662.html

SPIR’s offer to would-be solar manufacturers is that SPIR itself — a veteran company in a variety of solar technologies, with well-established manufacturing, has been a supplier of turnkey factories, as well as developing, building and selling PV cells itself.  So for the European or Asian manufacturer, SPIR can be a one-stop shop.  From a government point of view, SPIR could conceivably be a funnel for federal funding leading to jobs and clean electricity (though to be clear, they do not imply the funding part in their news release).  Not surprisingly, SPIR is up more than 7% as I write this, to $7.11 on slightly heavier-than-average volume, though the 52-week high of $18.75 still looks a long way off.

At the same time, a range of solar-energy companies have begun to look a bit more sunnyside up themselves with the stimulus emphasis on renewables.  The biggest is Tempe, AZ-based First Solar (Nasdaq: FSLR, http://www.firstsolar.com/), a stone’s throw from President Obama’s speech yesterday — they are up nearly 3% at the moment, to $132.99.   Much smaller, but still hefty, San Jose, CA-based SunPower Corp (Nasdaq:SPWRA, http://www.sunpowercorp.com),  is up more than 3% to $33.29, vs a high of $107.00.  Both of those could be considered blue-light specials by some shoppers, especially since SunPower is expecting to bring a 250-megawatt installation online in California in 2010, and was chosen by DOE to solar-electrify DOE’s own HQ in DC (http://seekingalpha.com/article/121436-solar-energy-brightens-up-on-stimulus-bill).  SunPower also was awarded more solar patents in 2008 than any other company, surpassing GE and Sharp.

Stepping down in market cap a bit more, Rochester Hills, MI-based Energy Conversion Devices Inc (Nasdaq: ENER, http://www.ovonic.com/) is flat-to-down, $25.65, vs a year-high of $83.33; and Wuxi, China-based Suntech Power Holdings (NYSE: STP, http://www.suntech-power.com/), which has a sour outlook for the year upcoming, was down to $8.21 (down nearly 9%) versus a year-high of $51.75.

Perhaps more interesting to smallcap investors, Roseville, CA-based Solar Power Inc (EBB: SOPW, http://www.solarpowerinc.net/), which is presenting today at the Piper Jaffray CleanTech and Renewables Conference in NYC, is down to $0.53 from a year-high of $2.45, in spite of a series of recent wins. 

To bring in a balancingly dour view, it is also worth reading an article from SeekingAlpha this morning, entitled “Is Alternative Energy Dead?” http://seekingalpha.com/article/121458-is-alternative-energy-dead.