What: Shares of Chinese solar stocks were down big in January as a convergence of factors worked against the entire industry. Canadian Solar (NASDAQ:CSIQ) was the worst, falling 30.4%, JinkoSolar Holding Co. (NYSE:JKS) fell 25.6%, and Trina Solar Limited (NYSE: TSL) was down 16.7% during the month. Since then, trading hasn't gone any better as a falling market and plunging oil prices have put continued pressure on solar stocks in February.
So what: It didn't help that oil prices fell nearly 10% during January because solar stocks have largely traded with oil lately. Oil isn't a direct competitor of solar electricity, but that doesn't mean they won't trade together in the short term.
The bigger problem was the collapse of market sentiment toward China at the beginning of 2016. There's a lot of concern that China's economy is slowing, and with the country accounting for over a quarter of all solar installations in 2015, there's a lot of downside if the economy slows. Right now, it doesn't look like China plans to slow its adoption of solar energy, but it's still a concern given the concentration of demand.
Another strange factor impacting Chinese solar stocks is the fact that companies are starting to find it worthwhile to pay European solar tariffs instead of complying to a minimum pricing scheme. Trina Solar joined Canadian Solar in foregoing the minimum price and annual sales quota in favor of paying tariffs in excess of 45%. If they're willing to sell into Europe with that kind of tariff, they must be selling solar panels for incredibly low prices (and low margins), which could mean weak profits going into 2016.
Now what: Through all of the market's ups and downs, Canadian Solar, JinkoSolar, and Trina Solar are still three of the best Chinese solar manufacturers, and they should be able to benefit from the industry's growth worldwide over the next decade. So, if you're bullish on these stocks, I wouldn't look at the performance in January as a reason to jump ship.
What will be key is proving that China's growing demand can lead to increasing demand and profits in the fourth quarter, so investors should keep a close eye on those numbers when they're released in coming months. It's making money, not generating demand for solar panels, that Chinese solar manufacturers have had the hardest time doing, and it's what has kept me from investing in this part of the solar industry until now.