(Editor's note: A version of this article appeared in
optionMONSTER's Open Order newsletter on March 30.
The ongoing nuclear crisis in Japan is giving some investors hope
in the future of the solar-energy sector. It seems like such a
common-sense thesis, but in reality is much less clear.
The biggest problem is that the solar sector is more dependent on
government policies than sound economics. Some pay utilities for
increasing their use of renewable energy, others give homeowners
tax breaks to install solar panels, and still more pay small
producers inflated rates for feeding electricity back into the
You could spend the rest of your life trying to understand these
policies. But the only thing you need to know is that they seem
to be going away, as I discussed recently.
The main reasons are money, efficacy, and abuse. U.S. states and
European countries simply don't have the resources to support
"green energy," and in some cases big companies are manipulating
the rules to get free money from the government.
"In light of recent abrupt policy changes in Italy coupled with
regulatory dynamics in Germany, we believe pricing will fall
faster than expected in 2011," Lazard Capital analyst Sanjay
Shrestha wrote in a report this month. He predicted industry
bifurcation as some companies rise to leadership and others fall
by the wayside.
We've already started seeing evidence of these problems in
company reports. Power-One, for instance, issued terrible
first-quarter guidance on Feb. 4. ReneSolar followed with a
forecast that was almost as bad on March 1. Late last month we
heard similarly pessimistic noises from German heavyweights SMA
Solar and Q-Cells.
If there is ever a key message that readers should take from my
columns it is the importance of identifying trends and betting
with them. In the case of solar, we have pessimism from analysts
and from companies. We also know that fiscal and political
realities are driving this sentiment--and that means the trend is
We also know that, like chips, stocks in this sector trade
closely in tandem with each other, so it's unlikely that one or
two will make a ton of money as the others collapse.
Some optimists, however, point to the humiliating electoral
defeat of Angela Merkel's party In March as a rebuke of her
pro-nuclear policy. Surely this is positive for solar stocks,
right? My answer is that a single vote in reaction to the very
recent disaster in Japan will prove irrelevant over the long run.
I suspect that ending Europe's reliance on nuclear energy will be
similar to closing the U.S. detention facility at Guantanamo Bay:
easy for candidates to say before they get elected, but much
harder to accomplish once in office.
Another important lesson from the solars is that multiples
matter. Anyone looking at this sector will be stunned by the fact
that several names trade for less than 10 times earnings despite
enjoying triple-digit growth rates. This is a giant warning sign
that something isn't right.
Stocks with real growth stories, such as Netflix and Illumina,
often trade at extremely high multiples. Their earnings beat
expectations, and their charts trend higher. These are the names
to buy on pullbacks.
That brings us to the technicals, which aren't particularly good
either because most solar names are trapped in ranges. LDK Solar,
for example, might push back toward its recent peak around $14
and SOL might fill its March 1 bearish gap toward $11 or $12--but
don't expect much more.
Trading opportunities do exist, but positions need to be managed
very closely. This is not a buy-and-hold sector like natural gas
(Chart courtesy of tradeMONSTER)
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