Solar Investment: Epic Correction Leads to Depressed Sector with Plenty of Potential

How epic has this correction been?  The answer is worse than the 1987 programmatic crash (S&P -32%) but not as bad, to date, as the 1973 oil crisis (S&P -48%) or the dot-com bubble (S&P -49%).   For an excellent graphic of these events and the current housing bubble (S&P -45%) visit here. 

But for sustainable energy the correction has been even more severe.   Our graph from the October 7, 2007 S&P 500 peak to now shows the changes to the four sectors we have been tracking since the S&P peak.   At their minimums the four indices were down between 65 - 80%.

The month of October was particularly bad for sustainable energy where 100% of the companies in our indices had negative returns.

Click to enlarge

So what am I optimistic about?  Simple, I’m optimistic the sustainable energy industry will continue to exist and at some point prices get so low that the stocks represent attractive buys.  I think this is particularly true for solar, as the statistics below show for 10 of the US traded companies I track in the Camino SOLAR idex (detail here).

SOLAR growth rates would have to slow dramatically to make the companies overpriced at current levels.   Even if their earnings growth slows by a factor of 4 these ten companies would still be fairly priced.  And I don’t see many reasons to expect such a slowing.  Modules prices are expected to fall which should boast sales and improve customer ROI. 

Retail electric prices are virtually unaffected by oil prices in many economies so the basic economic benefit of solar isn’t going away.   Subsidies are locked in in the US.  Financing should be available with the massive governmental pushes to create liquidity while lowering rates.   And the technology continues to improve further driving down costs and improving solar’s competitive position. 

There may be other bargains in the sustainable energy sector but the solar sector is a good place to start with plenty of potential investment targets.

Disclosure: Mark has positions in JASO, SOL, CSIQ, STP, SOLF, and LDK.

Comments

[NOWHEREMAN:]

Agree. The problem, as I see it, is the same as the Junior Gold miners face. So buying a basket of solar companies is the route to go, as you have done.

Would an ETF like Cleanenergy suffice or do you prefer to use a rifle vs shotgun approach?

2008 Nov 02 05:12 PM

[borisb:]

i agree prices are low-ish and the US market might be 8x larger then the largest .... Spain. Democrats might get the ball rolling. A US feed tariff would be stellar.

2008 Nov 02 05:27 PM

[gebby:]

the economics of global warming or global climate change trumps all. the potential for these investments is under appreciated.

2008 Nov 02 07:59 PM

[billp37:]

Heat rate for solar and wind energies has got us really interested .

www.energyvortex.com/e...

We don't believe, unless convinced otherwise, that the laws of thermodynamics have been repealed for solar and wind electric generation technologies.

So let's have some more fun trying to find about heat rates for solar and wind.

While trying to get our $22,036 back from the feds, of course.

www.prosefights.org/nm...

We were fairly successful about finding out how the Iraq/Iran war got started.

www.google.com/search?...

So let's try to repeat our previous success with HEAT RATE for solar and wind.

2008 Nov 02 08:37 PM

[Garry:]

Nice article. It's nice to hear this from someone with your credentials. And it does seem to me that the GS types recommend a sector and company with a buy rating, see the stock fall 65%, and then change to a sell. So who should be listening to Goldman Sachs anyway? I would ask however, if the market softens a little, it seems like the narrow margins the solars earn could have a sharp impact on the "E" of the P/E, and drive the earnings to zero or worse. Any comment on that?

It also seems like now is the time to invest in the solar space, rather than when all is rosy. Any comments Mark?

2008 Nov 02 09:03 PM

[NOWHEREMAN:]

That's really where the statement: Blood in the Streets can be used. It could Identify a Sector(s) as well as the Market as a whole.

Most of the Solars look like Freddy has done a number on them. But some will do better than others. Picking the most battered isn't enough because they might have other issues.

So I suggest doing what Mark has done, put together a basket. Those with low current PE ratios would be first, make some room for potentially viable Tech, and toss in a speculative play, some stock that has lost most of its value.

I give all of you a site that I use, it currently requires only your registration. www. J3SG.com

For your registration, you can opt to receive Insider Trades on the companies you input the Symbol on, in your email as they come in. It will include option excercises, stock awards, shares bought both directly and indirectly, open market transactions etc.

When buying your Solar Stocks, I would suggest a visit there first. It will help "weed out the weeds".

2008 Nov 02 10:54 PM

[Mark Henwood:]

You can visit www.caminoenergy.com/s... and see a complete list of the ETFs available in this space and their returns. The broad based ETFs have all kinds of stuff in them that may or may not be decent strategies in sustainable energy. I seen no reason why these ETF improve a Fama/French type index portfolio and I don't use them.

The sector specific ETFs breakdown into the the "Wind" ETFs and the Solar ETFs. The Wind ETFs also contain non-wind names because there aren't enough pure play wind companies to form an ETF. There are enough to form a Renewable Electricity ETF, but just barely.

On the Solar side the two ETFs are roughly equivalent. That said, with a little more work you can look at the names in the ETF and potentially make a better selection then the ETF's index rules. That is the course I have taken.

On Nov 02 05:12 PM paultaut wrote:

> Agree. The problem, as I see it, is the same as the Junior Gold miners
> face. So buying a basket of solar companies is the route to go, as
> you have done.
>
> Would an ETF like Cleanenergy suffice or do you prefer to use a rifle
> vs shotgun approach?

2008 Nov 02 11:36 PM

[VintonCounty:]

Solar energy and most other "sustainable" energy schemes would collapse without congressional subsidies. That is a danger to investment that is never mentioned. Investors believe the thieves in Congress will forever steal for them, but is it prudent to trust thieves.

2008 Nov 03 12:33 AM