Friday, March 27, 2009

Update on solar stocks

I made a series of posts 3-4 months ago about some incredible bargains in solar stocks. At that time we were in the midst of the 2008 global market crash. The market was in transition from supply constrained (due to the end of a multi-year shortage of silicon) to demand constrained. Basically the lousy economy, falling home prices (and credit crisis) has made it hard to finance relatively large expenditures like a car purchase or solar installation.

Wall Street has become very bearish on the solar sector--releasing a raft of downgrades in the sector over the last couple weeks--pointing to greater silicon supply (and thus lower silicon prices) and lower module prices (they fell about 7% in Q4 08 and probably fell another 7% in Q1). For some reason Wall Street analysts think that a big price drop combined with a big increase in incentives will not increase demand. (but hey these guys also missed the crash) Six months ago wholesale panels cost ~$3.5/watt, now they are ~$3/watt. A 15% drop in prices in 6 months is challenging (it is about 2 years worth of estimated price declines before the global market crash), and could result in some ugly inventory write-downs for Q1. Remarkably solar stocks have held their ground or even moved higher with this onslaught of downgrades--perhaps because silicon prices are falling faster than module prices? If silicon dropped say 30%, module makers could actually end up with higher margins.

Looking beyond the next couple months there are some reasons to be very bullish on solar. Starting in 2009-2016 utilities, and homeowners in the US get an uncapped 30% federal tax credit (businesses already had this)--look for this to boost solar adoption in the NE and SW where many states offer additional subsides (In CA state + federal incentives cover more than 1/2 the installed cost of solar.) The recently passes $787B stimulus bill has a number of goodies for solar and the Obama budget for 2010 will likely continue to support renewable energy.

Just this week China announced that it will offer a solar subsidy of nearly $3/watt. Details are still sketchy, but on its face this is a bold move. This really surprised me and I think changes the solar market psychology (especially for Chinese companies) from survival mode to growth mode. For the first time the US, China, Japan and Europe will all be offering significant subsidies for solar power. Once the recent drop in silicon and module prices is digested and assuming it is passed on by installers, I think demand will surge. I even wonder what the next bottleneck will be…inverters?

I continue to think that Sunpower is one of the best positioned solar companies, in terms of a great brand and diversified activities (50% of revenue from making solar panels and 50% from installing them). They have the most efficient solar panels on the market (silicon based) and have been able to maintain a premium price as a result.

SPWRB trades at just under $22/share (make sure to buy the B class shares since they are 15% cheaper than the A class). I think SPWRB will double in the coming year.

MEMC (ticker WFR) is a maker of silicon that goes into solar cells (and semiconductor chips). The price of silicon is dropping while the company is expanding capacity. This makes analysis a little complicated. Sales and earnings could grow if prices stabilize, or they could shrink if the price of silicon keeps dropping. Surprisingly it was the major semiconductor chip companies delaying orders that most hurt the company last quarter...the solar half of their business did just fine. The stock is trading about $18.5 and I think it will rise to $26 in the next year (N.B. WFR had a big move this week, up about $3 on takeover speculation--I think a takeover is very unlikely). If the shares run up another $2 in the coming days I'll probably sell some shares. I'd wait for the shares to pull back to ~$16 to buy back in. News of stabilizing silicon demand/prices (especially from chip companies like Intel) would cause me to adjust these targets upward by several $.

FirstSolar is the other widely acknowledged leader in the solar field because it offers the lowest cost panels (it uses a thin film technology that does not rely on silicon). Obviously low cost solar is all good and FirstSolar will do well in a growing market for solar. FSLR trades at about $147 and it will likely rise 50% in the coming year. While I like FSLR, I am concerned that the drop in silicon prices over the last couple quarters mostly benefits its competitors and may put some downward pressure on its margins.

If you prefer to get broad exposure to "clean tech" companies (i.e. but you don't want to buy individual stocks) you can buy an PBW (powershares wilderhill cleantech--an exchange traded fund/ETF) for just over $8/sh. An ETF is basically a mutual fund that you can buy and sell just like a stock (no minimums, no early withdrawal penalties, etc.). Because it is a fund I would look for at most 25%-30% appreciation in the coming year: price target $10-$11.

If you want to buy one solar stock, buy SPWRB.

If you'd prefer to buy a diversified clean tech fund buy PBW (you get the above three along with several dozen other companies from electronics to wind and everything in between).

Disclosure: I own shares of WFR, SPWRB and PBW.

Take this post for what it is: one person thinking out loud. I only post it because there has been such a deluge of Wall Street “professionals” trashing solar stocks recently that I feel compelled to respond. Please consult an investment professional before acting on any stock recommendations from any blog—especially this one! I am an aggressive investor with an off the charts tolerance for risk. These are my personal views based on my (incomplete) understanding of solar markets. Do your own due diligence.


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