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The stocks of a number of “green” companies have soared and then crashed and burned over the past year or two. This is particularly true in the solar energy field. For example, Energy Conversion Devices saw its stock climb above 80 in mid-2008. But the company’s results never justified the lofty valuation, and it ended up filing for bankruptcy on February 14 of this year. The stock has fallen to 0.16, and it is probably overpriced even at that level.
We’ve seen this happen many times before. A few stocks, or a whole sector, catch the public’s fancy, and the share prices take off only to come back to earth a few months or quarters later. Solar power is just the latest in a long list of trendy sectors--after telecom, internet and theme restaurant companies to name just a few.
Our number one rule in choosing turnaround stocks is that there must be a solid core business with long-term viability. Sometimes one of these trendy companies will eventually find a way to make money, and the stock will rise Phoenix-like from the ashes, but most of the time that doesn’t happen. Sometimes the trendy theme is merely a passing fad. Or the business model that looked so good on paper doesn’t actually work.
Sometimes the business concept may be okay, but it turns out that someone else can execute it more cheaply. That’s what has happened in solar power. The Chinese solar companies are eating everyone else’s lunch.
The bottom line is that trendy companies rarely make good turnaround investments. For the turnaround to work, there must be a solid, viable core business to rebuild around.