Ring the bells and set off the fireworks! The solar industry is back, and solar stocks are hot again.
Or at least, that's what one analyst on Wall Street thinks. This morning, noted solar bear Gordon Johnson at Axiom Capital (find his record on TipRanks here) announced that, after a long run of bearish sentiment in the solar power industry, conditions are finally ripe for a turnaround. Accordingly, he's pulled a complete 180 and reversed his sell ratings on three of the bigger names in the industry, and declares that as of today, Yingli Green Energy (NYSE:YGE), Trina Solar (NYSE:TSL), and JA Solar (NASDAQ:JASO) are all buys. (And by the way, SolarCity (NASDAQ:SCTY) is a hold.)
Why the sudden optimism over solar stocks? In a word: China. Johnson believes that new demand for solar panels from the Middle Kingdom will provide at least a short-term boost to the industry.
Here are three things you need to know to understand why.
1. China loves solar (for now)
Axiom's entire thesis for short-term optimism about these solar stocks revolves around China and its "feed-in tariff" (FiT) -- the system for subsidizing companies buying solar panels. As explained in a write-up on StreetInsider.com, China has proposed cutting its FiT on July 1, 2017. And while that may sound like bad news for solar panel sellers, Axiom notes that the last time China cut its FiT, solar panel buyers rushed to place orders for an extra 20 gigawatts' worth of panels -- hoping to claim the credits before they expired.
This time around, Axiom is estimating that China's FiT cut will "pull-in" 25 gigawatts' worth of panel orders more than would ordinarily have been expected this year. When combined with the orders buyers were planning on placing anyway, the analyst is expecting to see a total order flow of "70.5GW" -- which is 5.7 gigawatts more demand than there is currently supply available to satisfy today.
While this effect might be short-lived, and expire once the FiT cuts are implemented, for now, it constitutes a tailwind to solar stocks.
2. Econ 101
So what happens when insatiable demand meets limited supply? "After seeing 32/18 straight weeks of week-over-week ("w/w") multi-wafer/multi-cell price declines, respectively," says Axiom, supply constraints plus a surge of new demand has begun "pushing prices across all solar substrates higher."
This, says Axiom, means that the "solar prices have bottomed," and are turning back up -- with all the potential for profits at Yingli, Trina, and JA Solar that that implies.
3. Lessons from history
Combined with the short-term benefit from increased demand for panels, Axiom notes, is the fact that for no particular reason (actually, Axiom diplomatically calls it "a nonfundamental sentiment"), investors really like buying solar stocks around this time of year.
As Axiom reminds, from 2013 to 2015, "over the Dec.-March timeframe, the Solar TAN Index has [averaged] a 19.9% return" -- due to no other apparent catalyst than the calendar dates. This time around, when solar stocks have the tailwind of a verifiable surge in demand for their products, Axiom is expecting to see the calendar effect supersized, with beneficial results for the prices of Yingli Green Energy, Trina Solar, and JA Solar as well.
(SolarCity, farther removed from China, won't benefit as much. But the knock-on effects of supply drying up in China may lend some support to SolarCity's panel-producing operations here in the U.S. as well -- hence a more modest upgrade to neutral for SolarCity stock).
Bonus thing: What a Hillary Clinton presidency might mean for solar investors
But speaking of the U.S., Axiom does touch on the U.S., if only tangentially. The analyst's optimism remains firmly focused on China. Yet at the same time, Axiom also muses as to how a "H. Clinton Presidential election win would" boost the fortunes of solar stocks such as SolarCity here in the U.S. "given her robust 140GW solar installation goal ... even if unachievable."
And given that solar stocks in general have underperformed the broader market, "falling 32.5% YTD vs. +5.7% for the S&P 500," the risk of Secretary Clinton not winning the presidential election, and not building 140 gigawatts of new solar power, would appear to be more than priced into solar stocks already.
At the same time, with both Trina and JA Solar already earning positive profits (the same can't be said for Yingli or SolarCity), the potential for at least some of these stocks outperforming the market is real -- regardless of who wins the election in November.
Fool contributor Rich Smith does not own shares of, nor is he short, any company named above. You can find him on Motley Fool CAPS, publicly pontificating under the handle TMFDitty, where he currently ranks No. 282 out of more than 75,000 rated members.
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