Thinking back over the last ten years there have been two sectors in particular that struck me as having strategic importance: solar energy and rare earth elements. Now almost five years after the market bottomed and much of the stock market has recovered, these sectors have yet to gain traction. So does that mean these sectors have no place in the future? Or have they simply been put on hold? If they have been put on hold, does that mean they present a good long-term value investment today? Let's take a closer look and get these answers.
Here comes the sun
Solar companies were among the hardest hit during the downturn of 2008. Many high-flyers that were trading at ridiculous valuations ended up losing upwards of 95% of their market cap. Investors got burned and many believed that these solar companies were worthless when government subsidies expired. They sold and never looked back. But perhaps they should have?
First Solar (FSLR +3.96%) has been posting handsome profits as of late and even is trading at reasonable valuations. Analysts are expecting $3.33 in earnings for FY 2014 and an 19% increase in earnings for 2015 to $3.95. Valuations are attractive with a price/book (P/B) of 1.30 and a price/sales (P/S) of 1.74. Finally, low LT debt/equity of 0.04 deserves some recognition following a tumultuous last five years.
Another U.S. based solar company also survived this trial by fire during its infancy. SunPower Corp (SPWR +0.00%) may not have quite as attractive valuations as First Solar but it is making great strides to increasing profitability. 2013 marked a significant turn for that company, posting earnings of $0.77/share. Compare this to a loss of $3.02 in 2012 and $6.14 loss in 2011. In spite of those losses SunPower has maintained a reasonable debt with a LT debt/equity of 0.35. This turnaround appears to have some legs as analysts are projecting a profit of $1.17 in FY 2014 and a 30% increase in earnings for FY 2015 to $1.53.
This is one rare stock
Here's a quick brainteaser. What do magnets, batteries, televisions, digital cameras, and refining all have in common? Answer: the use of rare earth elements.
These are just some of the areas that REE's are used in today with many more applications possible for the future.
So what are REE's? In short, they are Lanthanoids, which are usually found in smaller quantities compared to other elemental deposits. Sometimes they occur as a by-product of other types of mining.
According to the USGS there are only eight dedicated mines to producing REE's, three of which are located in China, with only one in the United States. These Chinese mines extract approximately 120,000 metric tons of rare earths annually according to the USGS, with the next largest producer being the U.S. at 3,000 tons. The math speaks for itself. China controls a vast majority of these deposits, meaning the entire globe could be subject to huge price fluctuations if the Chinese government sees these deposits as an increasingly strategic asset, which many see as likely. Since the REE sector is largely undeveloped in the U.S. and no companies currently meet the market requirements for mention here, diligent investors might benefit from doing a bit of homework in this sector to find that domestic provider.
Final thoughts
A future with increasing use of solar energy and products that exist through the application of REE's is easy to picture. A future without them is a bit more difficult. Solar has found its niche among modern energy providers and looks to be gaining traction. REE's are a bit tougher to predict due to the virtual monopoly that China has on this sector. But being the only domestic provider of a highly inelastic input for production can be very advantageous. If you're looking to put one foot firmly in the future and have a bit of patience and slightly higher risk tolerance, these investments might be for you.
