It's been a great month for solar stocks as the stars aligned perfectly to create a rally. Demand fears subsided, analysts upgraded the stocks, and selling prices appeared to be holding up in the first half of the year.
Four of the biggest solar manufacturers led the charge, and based on forward P/E ratios, they look to have more upside potential if demand remains strong.
Stock Performance in 2011
Forward P/E Ratio
3 points driving solar higher
- Solar stocks have been rising along with oil prices, a commodity that should drive solar stocks higher. The unrest in Egypt hasn't hurt either as oil and energy security move from the back burner to a serious concern.
- Germany has once again provided a boost by delaying feed-in tariff cuts and deciding against a hard cap. Every six months or so, the market predicts falling demand in solar, and as usual Germany came to the rescue.
- China restricting poly silicon expansion should give investors in leveraged manufacturers like LDK Solar
and Yingli Solar (NYSE: LDK) a little comfort. The reduced supply may ease price pressure in 2012 and beyond depending on how the restrictions play out. (NYSE: YGE)
But none of these points for driving solar higher are really solid foundations to stand on. Oil can be extremely volatile, German feed-in tariffs will fall eventually, and we don't know exactly how long China will resist solar manufacturing expansion. As usual, we're left to hope that crutches will become available periodically until solar can stand on its own two feet.
We are still hearing about price pressure in the second half of the year, so manufacturers may be playing a game of "price-per-watt chicken" throughout 2011.
3 things to worry about
- Italy is a huge wild card right now. In 2010, somewhere between 1.8 and 6 gigawatts were installed or planned in the boot-shaped country. The problem is that no one knows how much solar has actually been installed and how much was applied for and may be installed in 2011.
- India plans to build 20 gigawatts of solar by 2020 and could be a huge market, but officials want all of the manufacturing to occur in India. This could end up being a point of trade contention along with U.S.–China fighting about solar subsidies.
- Who will be the first to start reducing prices aggressively? One Morgan Stanley analyst reduced his fourth-quarter 2011 selling price target to $1.35/watt for First Solar, down from a previous $1.45 estimate. First Solar may lead the charge, but Trina, Yingli, and others will also be fighting for their share.
I'm not a long-term bear, but after such a hot streak it may just be time for the solar bears to come out of hibernation and have their moment in the sun.
Bullish, bearish, or out of the game?
I've been pounding the solar drumbeat since November, when solar stocks took a drubbing despite phenomenal earnings and positive management outlook. Since then, analysts have jumped on the bandwagon, and investors have been taken for a nice ride higher.
Over the years, I've learned that in volatile stocks sometimes it's best to focus on the negative when everyone is positive and vice versa. I won't be selling my solar stocks, but I am considering selling out of the money, covered call options on some of my positions. If the stock goes down, I get little cash to help me sleep at night, and if the stock goes up I still cash out with a very nice gain. Options aren't for everyone, but if you're interested in learning how they might help your returns, check out fellow Fool Jeff Fischer's article here.
Another one bites the dust?
We need to at least mention one of solar's colossal failures in 2011. Evergreen Solar
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Fool contributor Travis Hoium owns shares of First Solar and SunPower. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.
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