The stock market is facing dual challenges of stubbornly high inflation and rising recession risk. As a result, the Nasdaq and Russell 2000 are firmly in bear market territory.
Due to these challenging circumstances, investors need to focus on the best ideas with strong fundamentals and powerful catalysts. They can no longer rely on the rising tide of a bull market - lifting all boats higher.
One of the best opportunities right now is the energy sector, which has remained quite stable even with China’s lockdowns. And despite a surge in prices due to the war in Ukraine, there are still no signs of demand destruction.
The energy sector offers several attractive options, including alternative energy. Recently, the alternative energy industry has experienced a major pullback due to the bear market in growth stocks. However, fundamentals have continued to improve, and the industry could be a big winner if energy prices keep trending higher. In fact, I believe the industry offers the best combination of growth and value.
In today’s article, I want to talk about an alternative energy stock with tantalizing upside for the rest of 2022 - Daqo New Energy (DQ).
Company Background
DQ develops and sells polysilicon to photovoltaic product manufacturers. Polysilicon is used to produce solar power products which means the stock is ultimately tied to the prospects of the solar industry.
In many ways, polysilicon is a commodity product which makes it vulnerable to swings in the industry. Therefore, it can be a fantastic investment during periods of rising prices but a poor one when prices are deflating.
Solar Industry
Currently, industry conditions are very favorable due to continued improvements in technology and higher energy prices which increase the return on investment in solar projects. A powerful catalyst for the sector has been Russia’s invasion of Ukraine which is forcing Europe to pivot away from Russian oil and gas.
The solution will have to be multi-pronged but will certainly include solar. Recently, the European Union announced a plan to cut red tape for wind and solar installations as it prioritizes its shift away from Russian energy.
DQ is one of the leaders in polysilicon manufacturing, and its production and sales volumes continue to trend higher with the average selling price increasing significantly over the last 2 years and are expected to continue climbing given the strong demand environment. On the operations side, DQ is finally realizing major cost savings with a new facility and higher production volumes.
GARP
Growth stocks have been mired in a brutal bear market since early 2021. We have seen pullbacks of greater than 75% in some of the high-flyers that were loved by retail investors.
We also know that at some point, the bear market will end, and another bull market will begin. Amid the wreckage, a handful of stocks will go on to make new highs and deliver spectacular returns to shareholders.
Investors should prioritize companies that have continued to grow in earnings and revenue despite the challenging environment. DQ fits the bill as it’s forecast to have 68% EPS growth and 83% revenue growth. It’s also seeing operating margins above 60% following operating margins below 30% prior to 2021.
Finally, the stock is very cheap with a forward P/E of 4.6 and $1 billion in cash while it has a total market cap of $3.3 billion.
Risks
Of course, there are some risks for DQ and this bullish outlook. One is a decline in energy prices whether it's a drop in demand due to recession or a resolution of the Russia-Ukraine war. This would likely cool solar demand.
The other risk is that DQ is a Chinese stock. There is an increase in terms of tensions between the two countries with disagreement on an assortment of matters including the financial statements of Chinese companies. Additionally, the Chinese government has taken a relatively unfriendly stance towards corporations over the past couple of years which has affected the business climate in China and the equity performance of Chinese stocks.
POWR Ratings
However, I believe that these risks are adequately reflected in the stock price and rock-bottom valuation. The POWR Ratings are also bullish on DQ as it’s rated a B which translates to a Buy. B-rated stocks have posted an average annual performance of 21.1% which compares favorably to the S&P 500’s annual 8.0% gain.
In terms of component grades, DQ has a B for Growth due to the catalysts mentioned above and the relative strength of the industries that its customers come from. Additionally, DQ has a B for Sentiment due to the Wall Street analysts having a consensus price target for the stock of $78 which implies 65% upside. Click here to see more of DQ’s POWR Ratings.
What To Do Next?
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DQ shares were trading at $50.19 per share on Friday afternoon, down $1.45 (-2.81%). Year-to-date, DQ has gained 24.48%, versus a -22.58% rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles.
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