3 Stocks That Could Suffer a Speculative Sector Sell-Off

Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Both the S&P 500 and the Nasdaq have declined sharply in recent trading, an acutely worrisome trend for sectors that previously rose faster than the general market. This is not to say that the higher stocks rise, the harder they fall -- just that sectors that rose due to speculation risk falling heavily in the weeks and months ahead. Three of the most speculative sectors that could face a decline are 3D printing, solar energy, and Japanese industries. Let's see what might lie ahead for three of those sectors' biggest outperformers.

Year to date, 3D Systems (NYSE: DDD), First Solar (NASDAQ: FSLR), and Sony (NYSE: SNE) are up 22.1%, 65.8%, and 69% respectively, far above the S&P 500 and the Nasdaq index:

^SPY data by YCharts

As the market panic accelerates, which of these companies is most likely to retain its value?

Solar: Overall, a positive story

The general overall conditions for the solar energy sector are improving. Many solar energy companies' earnings reports demonstrate stable output and prices. JA Solar's (NASDAQ: JASO) reported quarterly earnings that beat the street. The company lost $0.85 per share, exceeding estimates by $0.35. JA Solar's $270 million in revenue beat estimates by more than $41 million.

Another solar play suggested its outlook was positive. Yingli Green Energy raised its shipment estimates for the current quarter. The company expects shipments to grow instead of decline, as previously guided.

First Solar's share price benefited from those related suppliers' positive news. Its shares are up 73% in 2013, and it has a healthy backlog for the next two years. The company aims to produce 15%-20% in margins for new projects.

First Solar has the option to be selective with its opportunities. To get ahead of the competitors mentioned, First Solar substantially restructed in its business last year. By focusing on the biggest solar-panel-farm projects around the world, First Solar ensures a more stable revenue stream even if solar prices weaken.

The news isn't quite as rosy for all solar companies. Trina Solar (NYSE: TSL) reported weak earnings and provided a weak forecast. The company lowered its shipment estimates to 390-400 megawatts because it's having a hard time generating positive margins from its sales, earning the company a downgrade from Goldman Sachs. For investors, Trina's weakness will mean that profit taking is in the cards at least in the short term.

3D Printing: Off 9% in a week

In the 3D printing space, 3D Systems peaked at above $51 on a number of occasions in May 2013. Lately, shares have stumbled, down 9% in just one week of trading.

The company's sales growth rates and positive returns from acquisitions both justify its high P/E. However, management recently took advantage of the rising share price to issue 100 million more shares. Insiders also sold more than 1 million shares after offering 7.5 million shares earlier in May.

Despite the volatility those share issuances generate, 3D Systems will likely have another strong quarter, thanks to growing revenue from its services and printer business. The company's track record also suggests that its future acquisitions will likely prove successful, which could also help support growth.

But in the short-term, 3D Systems' shares could sell off heavily, as investors reduce their exposure to expensive stocks. Note also that bearish investors, skeptical that the company can maintain its growth-by-acquisition model, have a 26% short float in the company.

Japan: Spinoff uncertainty for Sony

In Japan, the Nikkei 225 index peaked at nearly 16,000. Since then, the index has dropped more than 15%.

Japanese conglomerate Sony's (NYSE: SNE) recent rise may have ended along with the Nikkei's. Sony is up almost 70% in 2013, but it pulled back almost 7% in the past week.

Much of the company's earlier gains were driven by hedge fund activist Dan Loeb, who pushed to spin off Sony's entertainment division. Loeb thinks the division would be worth 9 times EBITDA on its own.

There are two major risks for Sony shareholders. First, the company's management rarely makes decisions quickly, especially when it's mulling over spinning off a major part of its business. Second, Dan Loeb may give up his efforts to shake up the company. Due to the delay between stock sales and the requirement to report these transactions, investors will be last to know if he's already reduced his exposure in the company.

At this time, there are few other catalysts that would justify a higher share price for Sony. Its new ultra-high-resolution 4K OLED television is not yet a mainstream product, and sales will not reach mass volume for at least another year. In the smartphone market, Sony is having success with its Android-based Xperia smartphone, but its rival Samsung enjoys the lion’s share of profits for Android phone sales.

Conclusion

Markets have lots of excess froth to unwind. After all, the S&P 500 SPDR ETF is up 13.2% in 2013, so even small corrections will not threaten its overall positive return. Yet investors need to remain vigilant with their speculative holdings.

Much of the gains in the sectors above came from the U.S. and Japan's quantitative easing efforts. But despite the resulting steady stream of low interest rates and cheap borrowing, bond yields are rising. If investors start to doubt QE's sustainability of QE, the stocks discussed above will sell off.

That decline would create a buying opportunity for fundamentally sound companies like First Solar and 3D Systems. But Sony sorely needs restructuring, and if QE stops, so could the catalysts driving its rise.


Chris Lau has no position in any stocks mentioned. The Motley Fool recommends 3D Systems. The Motley Fool owns shares of 3D Systems and has the following options: Short Jan 2014 $36 Calls on 3D Systems and Short Jan 2014 $20 Puts on 3D Systems. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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