Barrons, FBR Advise Against First Solar; Shares Fall

Barrons wrote about First Solar's weaknesses and competitive threats this weekend (Reuters coverage of Barron's commentary here), and an analyst, FBR Capital Markets, followed up Barron's with a downgrade on Tuesday morning.

The FBR analyst, who slapped an "underperform" rating on FSLR, mused that "recent checks indicate at least one of First Solar's top customers has already switched from First Solar to a silicon-based module vendor for a project that is currently under construction."

The Yahoo! article covering the analyst downgrade elaborated. "Hosseini noted that FBR's meeting with the KfW Bank Group, a Frankfurt-based development bank that lends especially to economic, social and ecological projects internationally, revealed that its year-to-date photovoltaic project backlog has shifted dramatically toward silicon-based modules compared with its 2008 thin-film-focused mix."

I have previously drawn similar conclusions on this blog and on Student Stocks. First Solar is a company that is ALREADY overvalued even before considering the significant, growing competition that they face from both silicon-panel makers and thin-film outfits. Though the share price unfortunately increased after my last article, I made (real) money in the past shorting FSLR from $280 to $140. Though shares have fallen $20 (10%) since the Barrons and FBR pieces, shares still should have plenty of downside room. I tried to short FSLR a few weeks ago (shares were at levels similar to today's price) but none were available.

I continue to dislike FSLR shares at this price, in this environment. I'd never go long, and I will be considering initiating a short position.


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Amazon Short-Call Follow Up

Though I myself didn't short shares of Amazon.com (AMZN) despite all of my recent negatively-slanted pieces, I am glad to report that shares are sitting lower than they were on every date that I published anything about them.

AMZN's recent decline can be attributed to the general market pullback, but looking forward, shares may continue to underperform. Below is a six month chart of AMZN:

Shares are still trading at $75 though the company is only expected to earn roughly $2/share next year. Even a 50% upward surprise (meaning yearly earnings of $3/share) still wouldn't make shares look cheap.

Looking at the chart, shares seemed to touch resistance (both 50 day moving average and some previous lows) today, so further movement downward could be looked at as a weak technical sign. Shares have also clearly broken the upward trend that began in march. Looking downward, there had previously been consolidation between $60 and $65, which could be a reasonable mid-term price if the wider market continues to correct. There's still a glaring gap between $50 and $57, but I wouldn't expect that to be filled anytime soon.

The bottom line, once again, is that Amazon is a great company but AMZN shares are still overvalued. I'm personally not initiating any short position at this point, but I'd rather short than buy long AMZN shares tomorrow.

And as always, if you're in the market for one of Amazon's new Kindle readers, please do through so my link below.

Buy a Kindle 2, Kindle DX, or anything else at Amazon.

Is it Time to Short Treasurys?

Seeking Alpha contributor Larry McDonald thinks so.

Many market analysts and observers have been screaming to short Treasurys for months as rates have hovered near all-time lows. Even Warren Buffet has now acknowledged that the current treasury situation appears to be bubble-like.

I agree that the current Treasury bond environment is unsustainable, but "when" is the key unknown. I was early when I called for an oil-bubble implosion, and I have also been early on shorting stocks like FSLR and CMG. But yields for Treasurys can't really get much lower, so it seems like downside risk for the shorting instruments (TBT) might be more limited.

The article is worth a read, and you can check it out here:
Read "Rising Treasury Yields Could Mean Its Time to Short Them" at Seeking Alpha.

Do Not Buy Chipotle Mexican Grill

How's this for a nice throwback - Short Chipotle Mexican Grill (CMG).

On my other blog, I wrote plenty about CMG's ridiculous valuation in late 2007 and early 2008. I was never actually able to short CMG shares, as I could never find any available, but that was ok - my initial call on October 31, 2007 was a bit early, and I would have probably covered as shares rose from $130 to $150. However, my thesis was eventually vindicated as shares fell from $150 to about $40 over the course of 2008.

Now shares have recovered back to about $80, and armchair analysts are once again labeling CMG shares as too expensive. Though company results have been impressive over the past few quarters, there appear to be some cracks under the surface that will cause a slip-up going forward.

Two article below are worth reading: The first, at Zachstocks, is a general overview on the bearish CMG case. The second is another piece at Seeking Alpha about recent insider sales of CMG shares.

Read the article "Chipotle - A Tasty Short Opportunity" at Zachstocks.
Read "Why are Insiders Losing their Taste for Chipotle" at Seeking Alpha.

Amazon's "Kindle DX" Hype May Provide Shorting Opportunity

Amazon is holding a press conference at a New York university tomorrow to probably announce what many optimistic investors had been waiting for: a Kindle with a bigger screen.

Much of the reason for the press conference seems lost as the important info has been leaking out over the past few days. Engadget, a popular electronics blog, published this post about the new Kindle, including leaked pictures.

Supposedly, the new Kindle will feature a 9.7 inch screen, enhanced browsing capabilities, and a built-in PDF reader, adding some more functionality to the device. However, the Kindle is still far from being a full-fledged computer-alternative (I'd argue that the most recent iPods are much more functional) so I don't know if the Kindle buzz is merited.

Newspaper and textbook publishers are looking to this bigger Kindle to try to increase popularity of their products: apparently, Case Western, Pace, Princeton, Reed, Arizona State, and Darden School at the University of Virginia will be participating in a trial where Kindles will be used in the classroom.

However, as a college student, I don't see this application of the device gaining much traction. Traditional textbooks are convenient because they can be taken everywhere (though not necessarily all at one time). The new Kindle will replicate this ability, with the added convenience of carrying a single device weighing ounces instead of lugging a half-dozen textbooks weighing 20 pounds. However, the appeal ends there. Paper textbooks can easily be marked up to enhance the learning experience; even with some sort of highlighting or annotation feature, the effect is largely lost on-screen. The best part about paper textbooks are their reusability; books used year after year are very cheap to buy secondhand, and even new books can be returned or resold for a significant portion of their face value. Though the Kindle user will likely be able to keep their Introduction to Macroeconomics book forever, it retains little value after the course is over.

I also think that there is an emotional objection to electronic textbooks. In my Penn State-mandated public speaking course, the required text was electronic. It amounted to a PDF with links to a limited-access website with additional material and assignments. For this, the publisher charged about $70 - a hefty price for some intellectual property. Students were outwardly angry and hostile, and many, like myself, didn't bother to even purchase the textbook. People would rather spend $100 for a paper version that they can sell to a friend or the bookstore for $50 than pay for material that feels like it should be free.

Maybe schools like Princeton will have free course materials or heavily subsidized textbooks, but I don't see the Kindle catching on at Penn State.

The other highly-touted new application is the reading of newspapers, and struggling companies like the New York Times are hoping that they can sell a lot of $10 monthly subscriptions to help stop the widespread bleeding. But as other bloggers and writers have pointed out, why would someone pay $10/month for the Times' limited-feature Kindle edition when their regular website features much deeper and richer content for free?

Unless there are some mind-blowing details that haven't been leaked yet, I don't see this new Kindle creating much of an addition to Amazon's bottom line anytime soon. I think that Amazon's shares are already more than fully valued, so if AMZN shares do pop tomorrow, that pop simply provides a juicier entry point for a short position.

Do Not Buy First Solar

I wrote about FSLR's overvaluation prior to their last earnings release, and the results disappointed the street, leading to share price decline.

During the last conference call, management cited economic headwinds and increased competition as risks to future performance. I don't think either of those threats decreased materially over the past quarter, and I expect both to continue into the future.

The general business environment may improve as the world economy recovers and developed nations continue to become "greener," but FSLR's competition gets stiffer by the day. Solar has become commoditized, and both traditional silicon-based panels and other thin-film competitors will continue to erode demand for FSLR products.

The share price will likely be very volitile after this earnings release; a plesasant surprise will send shares skyward, while continued disappointment will drive shares lower. FSLR still trades at a premium valuation, and I believe that shares have plenty of room to fall.

Do Not Buy Swine Flu Stocks Follow-up

This morning, I wrote about huge daily declines in share prices of companies that have exposure to any business that may be adversely affected by the swine flu (or simply a reluctance to travel/go out because of fear of it). Shares of such companies continued to fall throughout the day:

• Carnival Corp. (CCL), -13.5%
• Royal Caribbean (RCL), -16.3%
• Southwest Airlines (LUV), - 9.4%
• US Airways (LCC), -17.4%
• Smithfield Foods (SFD), -12.4%

All five companies mentioned saw a slight rebound in aftermarket trading (generally 1-2%), suggesting that investors were ready to expose themselves to some risk.

The pace of new developments in this swine flu saga seems to be slowing, pointing to a possible end of such knee-jerk declines. However, some entities continue to escalate their reactions: Russia has temporarily banned meat imports from Mexico and a few US states, and more recently announced that it will begin checking planes arriving from the Americas. The World Health Organization has also raised its alertness level, and new cases are continuing to pop up in different corners of the globe.

So how does swine flu relate to stocks right now? I would not yet dabble in companies and industries (travel, meat, etc.) that are effected (actually or psychologically) from this swine flu concern. If and when the panic blows over, investors that jumped in at the right time will realize healthy gains from stocks like CCL. However, it is too soon to discern the extent of this swine flu problem, so prudent investors should avoid buying any affected companies in the immediate future.

Do Not Buy Amazon.com

Amazon.com began as an internet book retailer and has expanded into sales of goods of all kinds. A consumer can now buy everything from groceries to the latest G-Unit CD on Amazon. Amazon's product offerings only continue to grow as they add more products to their site directly and invite outside sellers to sell through the Amazon portal. Amazon has even begun developing and selling its own products: the recently-introduced Kindle 2 created much buzz and will fluff Amazon's bottom line as they are the sole retailer of the high-margin product: "A teardown analysis of the Kindle 2 by market research firm iSuppli estimates the cost to build the device at $185.49, or about 52% of its retail price of $359" (Businessweek).

With other offerings like apparel, foodstuffs, and mp3 downloads, Amazon is attempting to diversify into a seller that can supply almost anything a consumer could want. The strategy does seem to be working, as revenue and profit keep increasing despite a sour economy. However, Amazon's weakness has always been tight margins, and margin expansion is unlikely. The internet is an ultra-competitive animal, as many websites (like SlickDeals.net) exist solely to alert consumers to good deals. Amazon's decision to allow outside sellers to sell products on the website (via the Fulfillment-by-Amazon program and the simpler Selling on Amazon option) allows sellers to attempt to match or undercut Amazon's prices, making it more difficult for Amazon to retain healthy markups (except on niche products like the Kindle).

When Amazon can't increase margins, they increase volume, which has worked thus far. I believe it will continue to work, as consumers will increasingly turn to Amazon to meet all of their discretionary needs, so I do believe that Amazon will continue to be a growing, healthy, and increasingly profitable company.

However, Amazon makes the Do Not Buy List due to an overly-rich current valuation. Amazon is expected to make $1.50 per share this year, slapping a price to earnings ratio of over 50 on shares. Even next year's earnings, currently estimated at $1.94, will maintain a P/E of over 40. Since I believe that Amazon will continue to perform well, I'll say that Amazon will make $2.75/share next year - even with such results, the shares would still trade at a 29 P/E. These ratios are much, much higher than competitors, and seem unsustainable despite recent enthusiasm.

eBay, Amazon's most comparable online competitor, trades at a P/E of just 10 (though that is partially attributable to problems with eBay's business). Wal-Mart, the diversified brick-and-mortar retailer, trades at a P/E of 15, while Target, Wal-Mart's smaller competitor, trades at a similar valuation. Best Buy, the electronics retailer, trades at roughly a 17 P/E.

Amazon's business model does differ from these retailers - Amazon is less of a pure-retail play with the addition of revenue streams like music sales, the Fulfillment by Amazon program, publishing, and more - but at its core, AMZN is a retailer. Amazon does have a world-class supply chain and does not have to pay for retail square footage like the aforementioned competitors do. But because a consumer can buy the same books, movies, and groceries from Target or Best Buy, Amazon's margins on such commoditized items will always remain slim.

The bottom line is that Amazon.com is a great company that trades at a somewhat-ridiculous valuation. AMZN will report earnings later this week, and I have a cannot believe that any news could propel shares much higher at this point. Therefore, Amazon will be placed on the Do Not Buy List for the short- to medium-term until margins show signs of improving, or earnings increase to a point where AMZN's P/E falls closer in line with competitors.