For all of the alternative energy companies listed on the Roen Financial Report website, a determination of fair value is calculated. This shows where I believe the stock lies within its fair value range, and is shown on the meter along with each company report (to see sample company reports click here).

To determine fair value, I project a “fair price” based on current, forward and trailing P/Es (price to earnings ratio) and EPS (earnings per share), then compare that to the current price.

The following example is for First Solar, using data as of 8/12/11. When you average a combination of the current EPS, three year of trailing EPS and three years of projected EPS, it comes out to 7.63. When you do the same for P/E, you get 18.76.

 The bottom of the fair price range is determined by taking the median of annual P/E lows for the past three years (15.55), and multiplying it by the average EPS determined above (7.63) to get a low fair price of 118.61. The top of the fair price range is similarly calculated using the median of annual PE highs for the past three years (23.76) multiplied by the average EPS (7.63) to get a high fair price range of181.63. The current price is then compared to this price range by quints, in the following manner:

80-100% of fair price range or over top fair price = Overvalued

60-80% of fair price range = Above fair value

40-60% of fair price range = Fair value

20-40% of fair price range = Below fair value

0-20% of fair price range or below bottom fair price = Undervalued