It's looking like it will be another rough day for solar stocks.
In 11:45 a.m. EDT trading, shares of residential solar power system installers Sunrun (NASDAQ:RUN) and Vivint Solar (NYSE:VSLR) are down 16.9% and 14.5%, respectively. Applied Materials (NASDAQ:AMAT), which makes equipment needed for the production of solar panels, is down an only slightly less extreme 10.7%.
Why are these stocks down so much?
Oil futures dropped sharply in early trading Monday, and because solar energy is largely a technology that competes with energy produced from burning oil, solar power -- and solar power stocks -- naturally become less and less attractive the cheaper oil gets.
And oil is now less than half what it cost as recently as January.
Result: Dramatically cheaper oil stocks, but also pretty steep discounts on the solar stocks that compete with them, as we're seeing today.
Will these stocks turn around and go back up as fast as they've been going down? Yes, and no, is my prediction. In the case of Sunrun and Vivint Solar, weak (and nonexistent, respectively) GAAP profits and negative free cash flow are going to weigh on these stocks heavily. They're not well positioned to thrive in the coming recession, and their worsened competitive position relative to oil is not going to help one bit.
On the other hand, Applied Materials boasts robust GAAP profits ($2.8 billion), even stronger free cash flow ($3 billion), and a balance sheet that, although not entirely debt-free, isn't particularly over-leveraged with only $1.5 billion more debt than cash on hand.
Applied Materials appears to me well positioned to not just survive the coming downturn, but -- at a valuation of less than 16 times free cash flow, a projected growth rate near 20%, and a modest dividend yield to boot -- to reward shareholders richly when the economy improves.