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Why Today's Solar Sell-Off Is No Reason to Panic

By Travis Hoium - Mar 24, 2014 at 2:40PM

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Solar stocks are down big today but the reason may simply be profit taking on Wall Street.

Solar stocks are taking it on the chin today as nearly every stock in the industry is down big, some nearly 10%.

SolarCity ( SCTY.DL ) continues last week's slide and is the biggest loser today, falling more than 8% as I write. Competitor SunPower ( SPWR -9.11% ) is also down nearly 5% despite an analyst upgrade today. Before you panic, let's take a look at what's going on today and long term in solar.

A SunPower carport, which provides shade and electric energy. Image courtesy of SunPower.

Back to reality for solar stocks
SolarCity has been losing ground on the market for nearly a month and is 32% off its all-time high. As I highlighted last week, I think the stock ran too far, too fast and investors didn't truly understand what shifts in the solar industry might mean for SolarCity's high-margin leasing business.

But this isn't a day to panic and a correction in SolarCity's stock to a more reasonable valuation isn't a bad thing for the company long term. As the stock is falling, expectations are coming more in line with reality and giving a buying opportunity for long-term investors.

A SolarCity distributed solar project, which are becoming more economical nationwide. Image courtesy of SolarCity.

SolarCity is still expecting to install between 475 MW and 525 MW of solar this year, up nearly 90% from a year ago. It may not generate $2 per watt in retained value long term, but it's now cash flow positive and has a world of opportunity in front of it. Shares may fall further, and if they do, it'll be a buying opportunity, not a reason to think the company is in trouble.

Today is really more of a trading reaction than a fundamental flaw with SolarCity and solar in general. Momentum traders loved SolarCity and anything involving Elon Musk, but they'll sell quickly when it looks like momentum has ended. That's likely the case with SolarCity, which can lead to volatility and a lower stock price but doesn't change the company's dominant position in residential solar.

Even good news can't help solar
Today, not even good news could help solar stocks. SunPower was upgraded by Baird this morning to an outperform rating and given a $42 price target, which can often lead a stock to pop. But the sell-off has overtaken that news and investors seem to be looking past the fact that one of the best names in solar is trading at just 20 times trailing earnings.  

First Solar utility scale installation. Utility solar is still the largest segment of the market and SunPower and First Solar are leaders in the segment. Image courtesy of First Solar.

In other good news, ReneSola ( SOL -13.70% ) reported a fourth-quarter profit of $800,000 and said shipments will jump again this year from 1.73 GW to between 2.3 and 2.5 GW. ReneSola is the latest Chinese manufacturer to report a profit and margins are now approaching sustainable levels.

On an industry level, Solarbuzz said today that it expects 100 GW in annual solar deployments in 2018, up from 37 GW in 2013. The future of the solar industry is phenomenal, but as we've seen today, it can be a bumpy ride.  

How to invest in solar now
Downstream solar continues to be a favorite of investors today because it's lower risk than owning panel manufacturers. Investors who are looking for lower risk in their investment should look at First Solar ( FSLR -3.71% ) and RGS Energy (NASDAQ: RGSE) as companies with great downstream exposure. First Solar is the steady utility scale company with the great balance sheet and RGS Energy is the small company with huge upside in residential solar.

My favorite pick is still SunPower, which not only has downstream exposure but also makes the most efficient panels in the industry, giving it a strategic advantage as the industry grows. It doesn't hurt that SunPower is profitable, sold out of panels this year, and is building a new plant with another major expansion expected this year.

These companies combine different amounts of risk and reward, giving a few great options for investors who are wanting to jump on solar stocks during today's sell-off.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

First Solar, Inc. Stock Quote
First Solar, Inc.
FSLR
$98.25 (-3.71%) $-3.79
ReneSola Ltd Stock Quote
ReneSola Ltd
SOL
$5.23 (-13.70%) $0.83
SunPower Corporation Stock Quote
SunPower Corporation
SPWR
$24.44 (-9.11%) $-2.45
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.

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