The Solar Sell-off Has Gotten Ridiculous

Solar stocks took another drubbing yesterday, this time on word that Italy's debt had been downgraded by S&P. If it isn't changes to a feed-in tariff, it's economic concerns, or falling oil prices, and now … it's debt ratings?

The downgrade and solar
Does the Italy downgrade really have anything to do with solar stocks? Ratepayers essentially pay for feed-in tariffs, and Italy's government finances have little to do with solar, save for setting policy and providing other incentives. And with sustainable changes made to the feed-in tariff earlier this year, I think it is unlikely additional changes will be made soon.

There's also the fact that solar is one of the few things Italy can point to as a success right now. One of the reason Italy's debt was downgraded was the prospect of stagnant growth, something the solar industry can help improve.

So while a downgrade of Italy's debt isn't good news, don't you think the market has taken it a little too far this time?

Case of the falling euro
One of the bigger problems for solar manufacturers is a constantly falling euro. That is a concern for China overall, because the EU is a major trade partner with China and is one of the biggest buyers of solar panels from Chinese manufacturers.

That's one of the reasons we've heard about China possibly buying the debt of troubled EU members in recent weeks. If European countries begin to default on their debt and the euro falls, then China will be affected too. China doesn't want that to happen.

Problems in Europe overshadow solar's growth everywhere else
Investors are quick to panic over concerns about solar's demand, but they're also typically slow to realize where new demand will come from. In 2008, when Spain was a major demand market and feed-in tariffs collapsed from overinstallation, everyone panicked. But Germany and Italy picked up the slack, and 2010 was a record year for the industry.

We will likely see a similar progression, with Germany and Italy becoming slightly smaller but more consistent demand sources within the next year, based on updated feed-in tariff plans. In addition, Japan, China, India, Malaysia, Indonesia, and the U.S. are also growing demand sources. In particular, China and the U.S. have a lot of capacity to build solar plants, and with costs falling, the economics play into solar developers' hands.

Are all of these companies going bankrupt?
Yesterday a friend asked me, "How long is the solar panic of 2011 gonna last? ... These companies are priced like they're going out of business." While I don't have the answer to when the market will see value in solar stocks, I can point to fundamentals that investors increasingly should be considering. Value investors often look at price/book value as a way to gauge a stock's value. A price/book value less than 1 indicates that a stock may be a good value, while growth stocks typically trade above a ratio of 1.

Company

Market Cap

Book Value

Price/Book Value

SunPower

$981 million

$1.49 billion

0.66

Trina Solar (NYSE: TSL  )

$585 million

$1.24 billion

0.47

Yingli Green Energy (NYSE: YGE  )

$547 million

$1.41 billion

0.39

Suntech Power (NYSE: STP  )

$572 million

$1.65 billion

0.35

JA Solar (Nasdaq: JASO  )

$370 million

$1.08 billion

0.34

LDK Solar (NYSE: LDK  )

$573 million

$1.36 billion

0.42

Source: Yahoo! Finance.

All of the companies listed above are priced not only as great values, but as if liquidation were their only option. And all of them except SunPower and LDK Solar have even more cash on hand than their entire market cap. The second quarter was bad, but it isn't as if most of these companies are shipping panels at a loss. Trina and Yingli had gross margins of 17% and 22.1%, respectively, and both companies were solidly profitable.

This has gone too far
I'm not sure exactly what the market is thinking but I'm not seeing the death of an industry staring us in the face. U.S. PV installations grew 69% in the second quarter, following 104% growth of installations in 2010. China has made a major commitment to solar power, and with costs falling and efficiency rising, the long-term trends favor solar.

There are risks, no doubt. JinkoSolar (NYSE: JKS  ) is being accused of dumping chemicals in China. But there are opportunities as well. First Solar (Nasdaq: FSLR  ) and SunPower provide investors with U.S. based investments and industry leading cost and efficiency respectively. If you're going to invest in solar, you might as well pick a leader.

In China, I would go with Trina Solar who has less short-term debt and a vertically integrated supply chain. That reduces many of the risks that are associated with Chinese competitors who rely on short-term loans and poly silicon or cell prices to make a profit.

This isn't a time for the faint of heart, but if you have conviction that solar is the future (like I do) now is the time to buy. Profits probably won't be robust until next year, when the demand sources I've listed above pick up, but these stocks provide a good value in the meantime. I've added positions in SunPower (B shares) and will consider adding more in coming weeks.

Fool contributor Travis Hoium owns shares of First Solar, SunPower, and LDK Solar. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings, or follow his CAPS picks at TMFFlushDraw.

The Motley Fool owns shares of First Solar. Motley Fool newsletter services have recommended buying shares of First Solar. 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.


Read/Post Comments (23) | Recommend This Article (23)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 21, 2011, at 4:15 PM, dangolf1890 wrote:

    You'd have to be an idiot to buy any solar company now. Most of these are set to fail, including $FSLR, which ironically relies on tax payers' money for it's revenue and cash. Strong Sell. Maybe I'll invest in a more competitive Chinese solar company come 7 years.

  • Report this Comment On September 21, 2011, at 4:35 PM, globalex wrote:

    Back to blue chips! Big oil has the upper hand. I wouldn't be surprised if they were involved in the short selling and media spin.

  • Report this Comment On September 21, 2011, at 4:37 PM, MaxTheTerrible wrote:

    Completely agree, that's why I increased my position in PWER today.

    Cheers!

  • Report this Comment On September 21, 2011, at 4:48 PM, VirtualTaco wrote:

    How is paying extra for electricity going to help the Italian economy grow exactly?

    > There's also the fact that solar is one of the few things Italy can point to as a success right now. One of the reason Italy's debt was downgraded was the prospect of stagnant growth, something the solar industry can help improve.

  • Report this Comment On September 21, 2011, at 4:48 PM, icrazy wrote:

    Since the person who wrote this has no common sense, I am reposting my well received pitch of FSLR here:

    Solar is just not profitable. Government aid alone can't change that, at some point they will have to become profitable on their own. That will not happen until there is a massive change in the technology that will make it more cost effective.You can't continue to sell your product at half what it is costing you and still stay in business. Even with all the efforts to make conventional froms of energy cost more, it is still going to take a long time for solar to be competitive.

  • Report this Comment On September 21, 2011, at 5:09 PM, globalex wrote:

    Solar could be viable if mass production was done on a level that would reduce the cost. All your major energy companies don't want this. They make more money forcing nuclear and coal down our throats. Cars used to be built inefficiently and were to expensive for the average consumer until Henry Ford mass produced them.

  • Report this Comment On September 21, 2011, at 5:25 PM, moneyman35 wrote:

    When i read articles like this I always remember someone telling me once "the market is always right and its never wrong."

    That is to say it doesn't matter if you disagree with the market or if the market is acting irrational, if the market decides that Solar is crap, its crap and it doesn't give a damn what your arguement is or how great it is.

    The market is kinda like my wife i guess...

  • Report this Comment On September 21, 2011, at 6:08 PM, Carlibra wrote:

    If I kept hammering on your wife, which is irrational behavior, does that make her crap? Likewise, my long position is LDK is being made to look like crap because it's being hammered each day. I believe it's being done intentionally.

    Although I can't prove it, I'm quite certain the oil companies and coal companies are behind all this short selling of LDK stock. The company has been on the NYSE ‘Threshold’ Securities list for 23 days. The list consists of stocks for which sellers failed to deliver 10,000 shares or more in the past five trading days and the level of “fails” is a minimum of 0.5 percent of the shares outstanding. In other words, they are borrowing phantom shares, which creates an unfair situation to the longs who had to put up money to buy their shares. The market for LDK is being manipulated.

  • Report this Comment On September 21, 2011, at 8:23 PM, ET69 wrote:

    Solar not profitable? You should look at all the tax breaks and incentives that oil companies get! Add in all the pollution (did you forget the GULF disaster already?) and dead bodies in the middle east from wars and solar and wind are a steal!

  • Report this Comment On September 21, 2011, at 9:57 PM, ravens9111 wrote:

    Solar is a losing proposition. China will undercut any U.S solar company. Solar is a pipe dream. The time it takes to break even on the investment is about 20 years. Who wants to do that unless the gubmint is going to pay for it? When these subsidies are gone, they will not sell. The technology is just not there right now. The only way solar can compete is if oil, natural gas, coal, nuclear, etc. ALL skyrocket. Or, you have to get the price down to a fraction of what it costs now. Which is it going to be? Neither right now so solar is out.

  • Report this Comment On September 21, 2011, at 10:41 PM, Carlibra wrote:

    How long does it take to recoup your investment?

    Again, it depends. Let’s say your annual electricity bills were $1000. After installing solar panels, they are now zero. If you invested $7000 on a solar panel system, simple math would say that it’s a 7-year recoupment period. But this does not take into consideration increases in utility rates (to which you would not be subject), nor the increase in value of your property from solar panels.

    Experts say that for every $1 you save on annual electricity bills, you experience over a $20 increase in value for your home. That’s over $20,000 with this example.

  • Report this Comment On September 21, 2011, at 10:51 PM, likechocolate wrote:

    I' really would like to understand how a stock like FIrst Solar goes from $170 a share to $70 a share in about 6 months. I don't see any disasterous news, what has changed since the first quarter - or is it just wall street manipulation? I suspect the hedgies are playing with this big time - volume was up like 300% today

  • Report this Comment On September 22, 2011, at 12:16 AM, NOTvuffett wrote:

    i would be rude saying solar is uncool. it just doesn't make economic sense at this time. shouldn't we put a 'risk-reward' calculation in all these govt. programs?

  • Report this Comment On September 22, 2011, at 2:43 AM, ahemhmm wrote:

    Mass-production is the key to reduce the price and the price doesn't really have to come down much to make it obviously a good investment.

    There are several arguments that support the solar industry and one of them is to be independent. Another is for the sake of the planet, I know all of the "market analysts" are laughing at that stuff but believe me the desire to not take part in the catastrophic leadership which many times revolves around energy supply, is definitely growing. Also the waste of energy by having it produced so far away from the end-user has to be taken into consideration and of course pollution as has been mentioned already.

    To say that solar is dead is just trying to be clever but the truth may lay somewhere completely different.

  • Report this Comment On September 22, 2011, at 8:42 AM, Onigato wrote:

    Solar is being bashed, and the latest string of bashing comes from the fact that one (1) Chinese solar company (JinkoSolar (NYSE: JKS ) is being investigated by the Chinese government for excessive pollution. One little company. And this comes on the heels of "Solyndra-gate," (not even a scandal, really) which comes on the heels of APower being halted by the NASDAQ, etc.

    Solar companies are being assaulted, but not because their individual bottom lines, top lines, or any line in between are doing poorly, but because people as a whole see the industry as weak and corrupt.

    Which makes it all the sweeter when I swoop in and scoop up discount shares of GTAT, LDK, STP, etc. They're trading at less than cash reserves for Heaven's sake! I call dibs!

  • Report this Comment On September 22, 2011, at 9:33 AM, TMFFlushDraw wrote:

    Great discussion everyone.

    To those of you pointing to the poor economics of solar I would like to see the facts that you base this on. China's FIT is $0.18/kWhr, Italy's FIT will be 0.17 Euro/kWhr by December for large scale ground mounted and 0.20 Euro/kWhr for large scale rooftop installations. Keep in mind that Europe has higher energy costs than the U.S.

    In California estimates are that solar costs less than $0.18/kWhr to install. What NEW generation source can you install for that cost today? Not nuclear!

    I wrote an article covering costs, which vary everywhere, that I have linked below.

    http://www.fool.com/investing/general/2011/06/27/how-expensi...

    By 2015 solar will likely cost less to install than what you currently pay for your electric bill. That doesn't sound too expensive for me.

    Travis Hoium

  • Report this Comment On September 22, 2011, at 12:53 PM, ahemhmm wrote:

    One day every industrial building in the southern part of the US will be covered with Solar Panels. May be even parking lots etc. The potential is enormous. The mere fact that they are not already is hard to grasp.

    Does anybody have a good guess how much energy such a of course currently very theoretical solar installation, would produce?

  • Report this Comment On September 22, 2011, at 1:22 PM, icrazy wrote:

    I'm not in disagreement that someday solar could become viable. I don't disagree that it should be sought after. I also do not let my political opinions cloud my financial decision making. Right now solar is not a good investment, and I hope that no one actually invested in solar as a result of this article, because they will be hating life if they did. Let it finish its free fall if you really must invest in it. But right now there are a lot better places for your money. As far as comparing with oil companies, I would not be putting my money there right now either. just whatever you do, don't let wishful thinking and political opinions cloud your judgment!

  • Report this Comment On September 22, 2011, at 3:24 PM, moneyman35 wrote:

    "If I kept hammering on your wife, which is irrational behavior, does that make her crap?"

    You don't get it and that's why your holding on to a long position that's plummeting.

    Even I you're right that oil companies are artificially pushing the price down. Then what?

    Even if it was true that was a no brained that solar energy was going to make boat loads of cash, even the oil companies couldn't hold the price down.

    Everybody and their dog would dump all they have into solar... Even oil companies. You've got tunnel vision my friend.

  • Report this Comment On September 23, 2011, at 4:47 AM, webmind wrote:

    Solar is the future, no doubt about it. But the question is when? Making money in the markets is all about timing. Remember George Gilder? Technology genius that understood every major technological advance, but couldn't invest for sh**. His newsletter went bust.

  • Report this Comment On September 23, 2011, at 5:54 AM, MichaelDSimms wrote:

    Bill Gates is right Solar is cute, but it's inefficient expensive and a joke. I owed some stock in a solar company and it tanked, I will never buy another solar company's stock at any price.

  • Report this Comment On September 28, 2011, at 10:06 AM, FutureMonkey wrote:

    Failure, Consolidation, and Survival of a few is a likely scenario. Like many disruptive technologies at the turn of the 20th century there were lots of start ups and players in the market, but we only remember the ones that survived.

    Even solar companies with really awesome innovative products (Solyndra) fail - not because of the product but because of the market (tanking silicon costs and undercutting by competition)

    If you pick the survivors you will likely be rewarded.

  • Report this Comment On September 28, 2011, at 2:46 PM, RavenManiac1968 wrote:

    I bought 45 solar panels for my house. I received a 30% fed tax credit, a $6k Maryland State grant, and a $5k Howard Coutny property tax credit. Based on my energy bills, and SREC sales, my payback period is 5 years.

    I haven't had an energy bill since March and have a nice fat credit on my energy bill that will take me through December.

    I think solar panels are great and I'm looking forward to years of no energy bills and selling my SRECS.

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