MEMC Electronic Trading At Attractive Valuation

MEMC Electronic (WFR) has experienced a sharp pullback since reporting earnings last week. After 2 years of beating estimates, I think investors were hoping for another big beat. The company still reported verys solid results, but I think a lot of momentum investors had become involved, and simply sold on the news.

WFR reported a big jump in earnings, and gross margins exceeded 50%, which is impressive. Management also indicated that it expected further margin improvement going forward, as solar sales to some big customers ramp up.

I think investors may be too focused on the lackluster semiconductor business. But solar business remains robust, and I don't think the supply/demand imbalance will be fixed until well into 2008 (some analysts predict 2H09 at the earliest).

The selloff has been sharp. You can see in the chart above that the stock is getting very oversold, on both the RSI and stochastics. And valuation has become compelling. At current levels, the stock is trading for roughly 13x next year's earnings. That is roughly half its expected growth rate.

I think this is an overreaction, and that the stock is a good value here. Even though it is hard to tell exactly when it will bottom, I added to my long position this morning.

long WFR