I have recommended JA Solar (JASO) a few times on these pages over the past several months, and I wanted to discuss some of the lessons that I learned from this stock. The market is a living laboratory and if you don’t try and learn from your mistakes, then trading is an exercise in futility, and you will be doomed to repeat your mistakes.
First of all, I was clearly wrong about JASO. I am not going to claim that I was “early” or that other investors are just stupid. The market has spoken, at least for now, and have resoundingly stated that I was wrong to be bullish on JASO around $5-$6 level as it resides at $1.62 now. So where did I go wrong? Here are a few things to think about.
The P/E Siren
I must admit that I was lulled in by the stock’s tantalizingly low P/E ratio, which was around 4x when I liked it. My thought process was that the stock was so cheap that any potential bad news was already priced in and that the margin of safety was huge. Clearly, I underestimated just how bad things were in the solar industry, and that a sickly Europe was a disaster waiting to happen. Germany is a huge source of demand for solar products, and the governments are in weak shape across the pond, which is spells doom for solar stocks.
Bottom Fishing
I also was guilty of trying to catch a falling knife. This is a risky strategy no matter how you slice it. I underestimated just how out of favor this industry was, and that stocks can always go lower, no matter how low they already are. Current-year estimates stand at 39 cents per share, down from $1.07 90 days ago. I wouldn’t be surprised at all if they dropped further. I’ll keep an eye on the stock, but it seems quite broken right now.
All that being said, disciplined money management rules including stop losses would have gotten you out of the stock much higher, and prevented such terrible losses. No serious trader should put money to work without these tools in place.
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