Power-One Trumps The Debt Ceiling

Power-One's quarterly earnings release Thursday evening allowed me to relax on Friday. Instead of reading news releases and fretting over what to do next, I went to the movies to see Cowboys and Aliens. My PWER investment continues to make sense.

They posted a good quarter. Revenues continued to grow both year over year and sequentially. Profits were good and also grew. Guidance was basically maintained. The company sees renewed activity in Europe and made good progress in North America, China, and India. Selling prices didn't crater and inventory isn't piling up. I believe it was the most positive solar report this quarter.

The stock rose today in spite of Obama's debt ceiling issues and I believe it will continue to inch upward as thinking returns to the market. Power-One doesn't have the "Chinese accounting" baggage, sells inverters not modules, and has a power solutions side of the business that accounts for 40 percent of the company. Because of the foregoing I'm hopeful that it starts to trade at a premium like FSLR does in the module business. Today PWER is still very cheap on a PEG, P/E, B/V, and cashflow basis. That shouldn't last.

Now if I was just as confident and vindicated on JASO! I've added to PWER and am anxiously awaiting JASO's earnings release and guidance in mid-August.

Cowboys win.

ADD Isn't A Stock Symbol, It's How The Market Is Functioning

Attention Deficit Disorder describes the hyperactivity of children, adults, and the Market. Parents, teachers, psychologists, and bosses can deal with the former grouping, I'm affected by the Mr. Market. The inability of markets to concentrate on what is truly important is maddening, but often helpful. We are in such times.

Investors should care about earnings/cashflow and the prospects for future earnings/cashflow. Additionally, they should keep an eye on the market's earnings yield, the inverse of the P/E, in relation to available bond yields. Stocks should move when there is a likelihood of change in those variables. They shouldn't gyrate every nano second as unrelated news is announced. But that is the world we invest in today. A world dominated by children and supercomputers. It drives me crazy, but also offers opportunities in mispriced values.

The market has recovered nicely from its Greek worries selloff, lessening the number of bargain securities. One area remains. Solar. The solar companies, with the exception of First Solar, are being given away. The Chinese manufacturers are going to dominate the module business; they are not going to go away. Some may have accounting issues, others will merge, and they all may lose money for a quarter or two, but there will be winners and the market has killed them all. Choosing between them is difficult. I've chosen JASO, TSL,YGE to spread the risk, but they are all cheap at current prices. The ETF TAN gives good exposure to solar, but it has a big position in FSLR and that is the only solar stock that isn't being given away. Big Chinese solar is cheap, but not without risk. But, at some point the ADD boys and girls will like the sector again and prices will rise dramatically.

A safer solar play is Power-One, an American inverter and power management company. It also is very cheap and has a bright future, plus the safety of not being Chinese-whatever that means. The hyperactive crowd will find this one eventually also.

Time for golf, and like in golf, keep your head down and don't pay attention to the daily drivel. Watch for future earnings, earnings yields, interest rates and not much else. Act when the ADD camp is stupid.

Not A PWER Expert Yet, But Getting In Deeper

I'm still learning about alternative energy conversion as I lose money on my initial Power-One purchases. So far I've convinced myself that I will still do well with the investment. But, it's starting to feel lonely as there are plenty of sellers and naysayers.

The three questions I constantly ask myself are: is solar/wind energy going away, is PWER a leader/survivor, and am I over-paying for the company? My recurring answers are No, Yes, No.

Economical or not, every country in the world is gravitating, to some degree, to alternative power generation. Subsidized yes, but becoming less so as oil prices increase. No one likes being hostage to oil producer states.

Alternative energy when produced needs to be converted into grid power and that's where PWER, and a slew of competitors, comes in. They also do about a $300MM business in power management for data centers and have about $200MM in cash, but evidently the market doesn't care! Power-One does about $700MM in inverter revenue and is the world's second largest inverter seller. New factories in Arizona and China are spearheading expansion into those two large markets for renewable projects. With a number two industry position, new factories, plenty of cash, and virtually no debt, I don't think PWER is facing failure. They could get acquired though by an Emerson or GE if they wanted to get serious about the market.

At a $7 share price, I can live with a poor first half of 2011 as plants are started up and inventory gluts are worked out. The company and analysts are still very upbeat about the full year performance, but if wrong, it's been priced into the share price. If margins fall dramatically and SGA gets out of control, causing net income to fall to $.50 a share, that 's only a P/E of 14 for a leading growth company.

Today I upped my ante and bought some January 2012 $5 calls. I paid about $2.85 for the options so I'll start, hopefully, breaking even at about $7.85. PWER finished the day at about $7.25. I liked the company in the $8s range, so I was happy to add to my position at an even lower price. PWER has 10 months to prove the naysayers incorrect and Crusty wise. In the meantime I continue to learn more about the industry.

Testing The Water With Power-One, Inc

Power-One goy killed about two weks ago and dropped over 20 percent. It has flat lined at about $9 since the big downdraft. The cause, like so many other slaughters, wasn't a poor earnings report, they beat street earnings and revenues handily, but provided lowered guidance and mentioned the word "glut". That's how 205 can fly out the window.

PWER has two businesses: power solutions for data centers and inverters for alternative energy. They've been in the solutions business for a long time and it keeps chugging along. The sexiness is in the inverter business where they convert the energy from solar and wind generation into power that can be sold to, and used by, power companies. The reduced sales are in the latter, as is the glut. The company expects it will take a quarter or two to work excess inventory, at the distributor level, through the system. PWER doesn't sell their inverters in the US or China, Europe is their main market, but they entered those two markets at the tail end of Q4. They are the second largest inverter company so they have a reasonable shot at gaining some traction in the US and China. The more successful they are the faster the excess inventory goes away and revenues resume their trajectory. Even with the glut, the reduced guidance calls for revenues of $1.1B-1.3B, exceeding 2010 revenue of $1B. PWER made $.96 eps, including a $.14 charge, in 2010. Analysts have been taking dow estimates, but concensus is still $1.16 eps. At $9, PWER is selling very inexpensively. Its cashflow multiple is also a gift. They have several hundred million dollars of cash and almost no debt.

I've started a position and hope that I continue to gain confidence so I can build a larger holding, but what do I know about solar and wind? Believers have all sorts of sum-of-the-parts valuations that get to $20+ and a commanding market share in a growing industry. But, a glut is a glut, and why did the glut develop? I'm comfortable enough to tip my toes in, but not ready to wade out deeper. Hopefully I will be a quasi solar/wind power inverter expert within a short while and be able to know whether I should dive in or rush back to the shore.