Back in December, after a major run-up in the shares, I penned a cautious piece on A-Power Energy Generation Systems
Despite all the shouting and zany sound effects on Financial Infotainment Clown TV, emotions and investing don't mix. If you fall in love with a stock, you're setting yourself up for confirmation bias, in which you embrace evidence that validates your thesis, and quickly reject contrary opinions. How many blissful, dividend-receiving shareholders listened to David Einhorn when he began laying out the short case for Allied Capital
The same rule of emotion-free investing applies equally to broadly hated stocks, whose neglect opens up special opportunities for investors able to look past the "ick" factor and assess financial reality. This led to unbelievable gains for Bill Ackman and other investors in the bankrupt General Growth Properties
Swooping in when other investors spazz out
Most of the time, I seek to own shares in businesses with durable competitive advantages and management teams that I respect and trust. At the right price, though, I could get interested in just about any stock. Yamana Gold
When I was quite new to the Fool, I ripped into this wildly popular gold miner in May 2007. The shares trade lower today, even with gold prices pushing north of $1,100 per ounce. No regrets there.
I watched Yamana sell off severely alongside Chesapeake Energy
I don't much like the way this company is run, and I didn't hold on to the shares for very long, but at the price offered, Yamana was a compelling value. In this instance, it was essential that I set my feelings aside and simply look at the fundamentals.
Continuous reassessment is key
At the right price, I could similarly change my tune on A-Power. Has the stock's plunge swung the pendulum too far toward pessimism? Let's look at what's happened.
A-Power's third-quarter earnings release in December didn't pack any big surprises. Instead, the shares suffered from a late-January private placement that really caught investors off guard. The company raised $83 million by issuing shares (plus warrants) at a 15% discount to the market price. The aspiring alt-energy conglomerate said it needed the cash in part to help close the $50 million purchase of distressed Japanese solar equipment maker EVATECH. The firm expects to be reimbursed for 45% of the purchase price, but it had to fully fund the transaction up front. That was a pretty tall order for a company with around $91 million on hand (excluding restricted cash) as of Sept. 30.
These events speak to my previously expressed concerns regarding empire-building and overreach; incidentally, that's exactly what bothered me about Yamana. Shareholders get diluted now, with the promise of big profits to come. Between the debt conversion and this share placement, A-Power now has about 30% more shares outstanding. That's a lot of ground to make up, in terms of per-share value creation.
At current prices, and based on my estimate of roughly 45 million shares outstanding, A-Power has a market cap of around $540 million -- nearly 17 times the company's guidance for 2009 "non-GAAP" earnings. That's not cheap, but the few analysts who cover this stock have some big expectations for 2010, implying a forward multiple of perhaps as little as 10 times earnings. That would put A-Power in the same valuation territory as Solarfun Power
I personally lack insight into A-Power's current earning power, let alone its likely results two to three years from now. Even with the share price drop, the value on offer here is just not clear enough to compel me to buy. I'll certainly keep tracking this ambitious outfit's progress, and will make sure to set aside my emotions as I continue to reassess the opportunity, both in A-Power and in the other stocks I follow. I hope you'll do the same.
