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KIMBERLEY KOENIG

IBD 50 Stocks To Watch: Leading Solar Energy Stock Rallies Near Buy Point

Chinese solar energy stock Daqo New Energy is in a base, forming a cup the past seven weeks. The company reported better-than-expected Q2 earnings numbers in early August.

The solar-component maker had two other catalysts behind the recent moves. First, Chinese stocks saw strength after the U.S. and China reached an agreement that will allow the U.S. to audit Chinese companies listed in the U.S.

Second, the solar industry has gained recent strength as the Inflation Reduction Act passed in mid-August, pushing solar and clean energy stocks up. The bill provides almost $369 million for clean-energy development to help thwart climate change. The White House is looking to triple domestic solar manufacturing capacity by 2024. The overall solar energy group increased on the deal.

Daqo New Energy has two main product lines, polysilicon and silicon wafers, which are used in the production of solar modules.

Energy Stock Forming Cup Base

The stock is forming a cup base with a buy point of 77.28 on the MarketSmith chart. The stock pulled back almost 4% Monday after an 8% gain on Friday on heavy volume, despite Friday's market sell-off.

Shares are holding above both the 21-exponential moving average and the 50-day moving average.

Its stock has earned a 98 Relative Strength Rating, meaning it has outperformed 98% of the stocks IBD tracks.

Daqo Scores High On IBD Criteria

Daqo New Energy has dual accolades, as it holds the No. 1 spot in the Energy-Solar Group, which is also ranked No. 1 of the 197 industries IBD tracks. The Energy-Solar group skyrocketed to No. 1 from No. 176, just three months ago.

Daqo meets all nine IBD criteria, including two perfect scores of 99 for both Composite Rating and EPS Rating.

Strong Q2 Earnings Report

The company beat on Q2 earnings-per-share and sales numbers on Aug. 3, and shares have traded in a choppy upward trend since the report. The June quarter showed gross margins of 76.1%, up from 63.5% in March, primarily driven by a 28% reduction in polysilicon production costs.

"With our facility in optimized stable operations, we believe we will be able to maintain, and possibly further improve, our cost structure in Q3 and Q4 this year. We expect an even more favorable outlook for cost at our new Inner Mongolia facility," said CEO Longgen Zhang.

Daqo had triple-digit sales growth in the last two quarters. It had commensurate EPS growth in the same time period. Analysts are expecting annual EPS to nearly triple this year, to $27.80 from $9.89 in 2021. Estimates are for a smaller increase yet still impressive annual EPS of $20.47 in 2023.

The company has a high 52% return on equity, a measure of financial efficiency.

Institutions Show Conviction For Energy Stock

Institutions hold 53% of the stock, while management owns 24% — both positive factors for a stock. Mutual funds have also added shares, with 540 owning the stock in June, up from 495 in March.

Nomura increased its price target on Daqo shares to 70 from 53 on Monday, maintaining its neutral rating.

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