Time to Get Agressive on Renewables?
Jul 26, 2010
Author: SCP Editor
An investor asked us the following question this morning:
Do you think it is time to go big time on margin into renewables, thinking they will catch up here to the market finally???
Our response:
Nope - margin is for extreme situations (opportunistically) in my opinion. Right now, we are in the Netherlands. Street continues to bet on $80-$85 on S&P 500 earnings this year. At $80, we are looking at a current P/E of 13.83. Historically, trades in the 14 range, so go ahead and mark 13 on the low side and 15 on the high side - which would put the S&P at 1,200 to the upside. To me that doesn't make a compelling use of margin.
I would be more inclined to use margin on a deeply oversold scenario.
My outlook for the S&P is more bearish. I don't think $80 will be attainable. I am looking for something closer to $65 to $70. At $70, we are at 15.8x earnings, which seems a bit topped out.
The data on the economic front remains mixed, so I don't see a scenario where the bulls run valuations up into the 16-20x range in any case.
This is all more 'macro' driven considerations. Drilling down the renewables, my general approach is not to try and swim upstream. So if the broader markets are getting pretty topped out, and could potentially pull back, I will wait for the pull back to stick the net into the stream for the fish I want to catch.
Until then, I am looking at relative strength as an opportunity to sell calls into (hedging downside risk)....when stocks pull back, selling puts on stocks I want to own at lower prices.
This morning's reaction to home sales data is what it is - 'less bad' - it is not 'good'. Businesses are still not hiring. Consumer sentiment remains in the tank. Washington is getting set to go to war over the Bush tax regime which will further infuse 'uncertainty' into the mix and the Street is not fond of uncertainty. It will certainly react to the potential that rich folks don't get to maintain their tax brackets at some point in the process.
