Please ensure Javascript is enabled for purposes of website accessibility

Time to Buy Yingli Green Energy, Trina Solar, and JA Solar?

By Rich Smith - Oct 6, 2016 at 1:28PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

One of the world's biggest solar bears just became a bull.

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 (SCTY.DL) 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.


Axiom Capital sees a bright future for solar power in China. Image source: Getty Images.

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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

SolarCity Corporation Stock Quote
SolarCity Corporation
SCTY.DL

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
330%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/23/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.