As a long-term investor, I admit I am not a big fan of making an annual stock pick. Far too often I have been too early with a stock pick, only to see it sink before it soared, notes Robert Rapier, editor of Investing Daily's Utility Forecaster.
In the past five years, I have recommended two companies in the solar sector to Investing Daily subscribers. The first was SolarEdge (SEDG) in 2015. I then recommended Daqo New Energy Corp. (DQ) in 2018. Both were companies that I expected to outperform the market over the next 5-10 years.
Both picks typify the kind of volatility you can expect in aggressive stock picks. I recommended SolarEdge at around $20 a share. It subsequently fell to $12 a share, and I took a lot of criticism for the pick.
Many investors sold it and it closed the year down, but I believed the company was sound and the solar sector would continue to soar. The company eventually reversed direction.
It recently closed at $356 a share. That is nearly a 1,700% gain in five years, but investors that bought when I recommended it (which I did myself) first endured a 40% loss.
Investors that bought Daqo at the time of the recommendation experienced a 40% gain in just a couple of months, before the Sino-American trade war and subsequent solar tariffs sent the share price reeling. At its lows, the share price was down 50% from my recommendation.
But I always tell people that they need to differentiate between investor psychology and long-term fundamentals. Fundamentals win out in the end, but it's hard to be patient. So far, Daqo (as SolarEdge did before it) has proven out the merits of patience — now up 711% in under three years.
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I believe both these companies have room to run. However, there is the potential for a correction, and there are more risks with Chinese high-purity polysilicon manufacturer Daqo than with solar inverter manufacturer SolarEdge.
SolarEdge has seen its sales grow at an average rate of 61% over the past five years. Long-term growth is forecast to be 25% annually. However, shares could pull back at some point this year. There is one way to guard against that.
SolarEdge offers large premiums on its call options. Since this is a pick for all of 2021, let us look at the call option that expires January 21, 2022. That call with a strike price of $360 has a premium of $91, which reduces your net outlay to $265 if you use a buy-write strategy.
A year from now, if SolarEdge stock price is still where it is today, you have a return of 34%. If shares are called away it is slightly better at 36%.
It is true that you give up any upside beyond that — and there could be substantial upside. But barring a deep dive in the share price, this is a strategy that can give a potentially nice return while protecting against those timing issues I discussed above.
