Turnaround investors must be especially wary of trendy sectors. Recently, this has been demonstrated by the dramatic implosion of several “green” energy companies, including wind and solar energy providers. We’ve seen dramatic falls from grace many times before. A few stocks, or a whole sector, catch the public’s fancy. Share prices skyrocket…only to come crashing back to earth a few months or quarters later. Solar power is simply the latest in a long list of fashionable sectors—after telecom, Internet and theme-based dining, to name just a few.
The Turnaround Letter’s one rule in choosing stocks is that there must be a solid core business with long-term viability. Although these trendy companies can sometimes find a way to make money, most of the time that does not happen. The trendy theme may merely be a passing fad, or the business model that looked so good on paper may not actually work.
Sometimes the business concept may be okay, but it turns out that someone else can execute it more cheaply. That’s what has happened in the solar power sector: Chinese solar companies are eating everyone else’s lunch. For a successful turnaround to work, you always need a solid, viable core business.