Chinese Solars Could Emerge From the Dark

 | Feb 01, 2014 | 1:00 PM EST
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2013 was a hot year for alternative-energy companies, and one area that particularly caught the public eye was that of solar power. Stocks such as Solar City (SCTY), JinkoSolar (JKS), and Canadian Solar (CSIQ) saw those gains extended into 2014, as well, as they hit a slew of new 52-week highs.

But others have fallen by the wayside, and among them are three of the top Chinese providers of solar energy infrastructure: Yingli Green Energy (YGE), Trina Solar (TSL) and China Sunenergy (CSUN). While all of these experienced a renewal of investor interest last year, they have spent the past quarter in full correction mode. This was partially due to pure short-term trend exhaustion into the third quarter, and in part because of speculation that China would be scaling back its generation targets for solar energy in 2014.

Last week Deutsche Bank reported that this was untrue, and that China would be maintaining its 14-gigawatt target, yet the news had very little effect on these three stocks. While they enjoyed some intraday upside on the heels of the announcement, all three had just struck support on the daily time frame, so they were due for a technical bounce regardless. Generation speculation aside, the question at this point is: Do the Chinese solar companies have a chance to make a comeback in 2014?

Analysts tend to hold very different -- and very strong -- feelings regarding the future of Yingli, Trina and Sunenergy. The Street Ratings team, for example, has deemed Yingli a Sell with a rating score of D. Indeed, this company's debt-to-equity ratio is higher than industry average, its return-on-equity has been decreasing year-over-year and its gross profit margin also remains low. Nevertheless, it has shown positive earnings growth over the past year -- and Deutsche Bank analyst Vishai Shah, for his part, has given the company a Buy rating.

Trina and Sunenergy also each have their share of proponents and naysayers. But, as any investor with even rudimentary experience knows, it's not all in the fundamentals. A company that looks great on paper may never yield a strong return for its investors, while those that may look overpriced can continue to soar as the cautious investor sits on the sidelines and ponders the insanity of it all.

When it comes to understanding price trends in a company's shares, one area of market analysis that can bring investors a sense of sensibility is the field of technical analysis. As we take a closer look into the technical development of these Chinese solar companies, let's first begin by looking back at Canadian Solar's stunning move over the past year.

This stock has had its share of rallies and upsets over the years. In fact, in 2012 Canadian Solar was retesting its all-time lows. Then, over the past year, the stock experienced a recovery move that every investor dreams of: From an average trading range between $3 and $5, the price jumped to a high of more than $43 last month. $51.80 was Canadian Solar's all-time high, but its current levels can still be considered a retest of that zone.

Currently Yingli, Trina and Sunenergy are all trading quite far from their all-time highs despite the strong rebounds they've already seen off their all-time 2012 lows. Keep in mind that, in Canadian Solar's case, the stock did not make its comeback in one swoop -- it paused at a halfway point on the monthly time frame, as circled in blue on the chart above. In fact, most recovery moves will undergo at least two waves of upside action, and this leaves the door open for at least one more upside continuation move in the Chinese solars as well, from a technical perspective. That said, their current daily and weekly charts suggest a longer period of congestion than what took place in Canadian Solar.

Should these continuations trigger, Yingli, Trina and Sunenergy will all be very susceptible to hype, and they will likely undergo very strong moves that could easily mirror their 2013 rallies before they strike resistance once again. I've labeled the next major resistance levels on the monthly charts. Essentially, for all three stocks these levels correspond to 2010 price congestion

Out of the three, Trina catches my interest the most, based on the technicals. As with Canadian Solar, the stock has found itself in a sideways channel over the years and has managed a strong recovery off 2009 lows, whereas Yingli and Sunenergy both experienced more difficult recoveries at that time. This set the bar, and at its current price level Trina has already recouped half of its losses from the 2011 bear drop. A second run would offer the stock a nice shot at mimicking Canadian Solar's recovery and reclaiming its own prior highs.

On the fundamental side, while Trina's debt remains a concern, the company has shown marked improvement in its earnings-per-share growth, and its net-income expansion has significantly exceeded that of the S&P 500 and comparable index components.

At the time of this writing, I am not personally interested in picking up these names -- but they have all made my "stocks to watch" list. As the current trading range continues to shape up, I will be monitoring them closely in the months ahead for buying opportunities. This may take several months, but here's one crucial sign to watch for: When these stocks undergo selloffs on the daily and weekly time frames, look for lower volume and slowing momentum as compared with the mid-congestion rallies.



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