A Walkthrough of How I Look at New Stocks
A disclaimer, I am not a financial advisor and my comments should never be taken as financial advice. Investments come with risk, so always do your research and analysis beforehand.
In my last article I wrote about three easy ways to look at a company as an investment. In this article I am taking this journey with you. I will take a look at a new company, and explain what I do to familiarize myself with it and why. I will also explain how I develop my outlook and thesis, and will share any analysis along the way. I hope this can provide you some ideas regarding methods to analyze and learn about companies. I chose Canadian Solar. I have been getting very interested in sustainable companies, and I plan to write more about them.
So right from the name I know they are a solar company. But of course we need more detail. The obvious solution is to google and the company’s about page, but I find this detail to not be in depth enough. I like to go right to the source, companies’ yearly financial statement fillings. To find these you go to the SEC EDGAR website and you type in the company’s ticker, then many fillings will show up. Normally we are concerned about a 10-K (yearly filling) or 10-Q (quarterly filling), but in this case Canadian Solar (CSIQ) is foreign, so their statement is called 20-F. You can sort by “Filling type”. You can click on the 20-F “documents” button and click on the link next to 20-F. Hopefully you have Canadian Solar’s financial statement open. The way I learn about businesses is by going to their business overview sections (you can control F).
From reading the overview we learn that Canadian Solar is a “vertically-integrated” global company. Canadian Solar wrote that they “design, develop and manufacture solar ingots, wafers, cells, modules and other solar power products. Our solar power products include standard solar modules and specialty solar products. We are incorporated in Canada and conduct most of our manufacturing operations in China and south-east Asia. Our products include a range of solar modules built to general specifications for use in a wide range of residential, commercial and industrial solar power generation systems.” In these few sentences we learn a lot. They manufacture components, as well as actual modules.
Canadian Solar also wrote, “In recent years, we have increased our investment in, and management attention on, our energy segment. Our energy segment primarily comprises solar power project development and sale, operating solar power projects and sales of electricity. Our energy segment contributed 20.0%, 42.1%, and 22.5% of our net revenues in 2017, 2018 and 2019, respectively.” Here we learn that Canadian Solar builds solar projects and sells them. These projects are made from modules manufactured by Canadian Solar. In addition, the modules are made from Canadian Solar’s manufactured components.
To find a breakdown of how a company makes money you can often “control-F” “overview”. You are looking for something along these lines: “over-view of financial results” or “results of operations”. Canadian Solar’s more stable revenue source is selling solar modules, specialty solar products (like solar energy storage and solar inverters), solar kits, as well as solar system services. This is called the MMS segment and it accounted for 80.0%, 57.9% and 77.5% of their net revenues in 2017, 2018 and 2019 respectively. The Energy segment which is selling electricity as well as selling solar projects generated 20.0%, 42.1%, and 22.5% of net revenues in 2017, 2018 and 2019, respectively. This revenue source is not as stable because it consists of a few, very expensive projects.
After describing what the company is and how it makes money we can now look at potential drivers of growth as well as risks associated with those drivers. To do this we will look at the two segments separately.
Some risks for the MMS segment are that Canadian Solar relies on a small number of suppliers, the demand for products fluctuates, and oversupply of product on the market is often a concern. Some risks in the energy segment are that there are a small number of buyers of solar projects, the company must invest money now for revenue years in the future, and that these projects take years to complete. Some risks looking at the whole company are that the CEO owns the largest percentage of stock, the company does business in China, and the company relies on government subsidies.
Any of these risks could negatively affect the stock price, for example, if suppliers go bankrupt, Canadian Solar’s profit would be hurt since it may not be able get supplies at a cheap price. Another example would be that companies and governments do not want to buy projects in a pandemic. Both of these examples would cause Canadian Solar to have less earnings, which could result in less investment in future projects. The end result would be lower revenue and stock price for years to come. In short, Canadian Solar’s future performance is dependent on its current performance more than most other industries.
Now that we looked at what would decrease the stock price, we should look at what would increase it. The most obvious drivers of a higher stock price to me are: Covid stimulus specifically for renewables, increase in government subsidies, utilities focusing on ESG, and finally general economic recovery so that consumers demand more retail solar applications. A majority of Canadian Solar’s revenue comes from companies- most solar modules the company produces are either used by Canadian Solar or are purchased by other companies. Finally, with a growing solar project segment, future drivers are likely to be macroeconomic, geopolitical, and come from a few large transactions. Progress on solar projects and more demand for solar projects will help Canadian Solar’s stock.
Now that we understand what may make the stock go up or down, as well as what the company is and how it makes money, we can begin a financial analysis. The financial analysis to determine valuation relative to its competitors will be shown in the next article. In addition, I will perform a basic technical analysis to determine if and when there is a good entry point. I hope you enjoyed reading the steps I take to get to know a company and seeing how I did for Canadian Solar.
In short, my process starts with opening a financial statement. I look at the self-described overview of the business first. I then look at how the company has made money. After this I look at risks and extrapolate drivers of revenue and profitability. After I understand this background, I value the company and compare it to its peers. If I like how it looks, I use some basic technical indicators to determine an entry point. Stay tuned for the second half!