What a day! On Thursday, we saw solar stock prices jump sharply higher in what can only be described as a stunning reversal of fortune. The two solar positions held in the ZachStocks Growth Model were up 12% and 45% respectively, and my actively traded Death Cross Trader service took home 189% gains in a solar related options play.
The move came out of the blue and caught many traders a bit unprepared. Investors sitting on the sidelines quickly realized their cash should be invested in this sector, and short sellers scrambled to cover positions while likely taking substantial losses.
But what actually caused this move? Why such a pronounced reaction? And will this mark the beginning of a new trend, or are we just seeing a “one-day-wonder?”
In order to answer these questions, let's first take a look at how we got to this spot in the first place.
Solar Energy’s Challenging Road
It’s been a difficult last six months for solar companies. Despite a worldwide push for alternative energy solutions, solar stocks have largely taken it on the chin.
The issue has been closely tied to the weakness in the credit markets. After all, it's no small thing to set up a 50,000 watt installation on top of an office park or at every retail location.
Prices for solar installation average $5 to $7 per watt. So a 50,000 watt project would cost a cool quarter million. But the good news is that once the installation is up and running, the maintenance costs are fairly low. So instead of paying $5,000 per month to keep the lights on, companies now just use their own solar energy.
So with these theoretical numbers (every situation has its own differences in details) it would take just over 4 years for the savings to cover the cost of installation. And then after that, energy is FREE for the rest of the useful life of the solar installation. Not a bad deal at all…
Can You Spare a Quarter Million?
But there’s just one problem. That initial price tag is quite a large hit. It may make good business sense, but who has a quarter million sitting around to spend on a long-term project? And if you’re putting in multiple locations, the cost is even larger.
In the past, an opportunity like this would be taken straight to Citigroup (NYSE:C), Bank of America (NYSE:BAC), Lehman Brothers or any other investment bank. The mathematics work, the savings are tangible, and so a deal could be hammered out in no time. The company might get a reasonably priced loan, or they may sell additional equity to raise the necessary cash. But the bottom line is the deal would get done.
But fast forward to late 2008 and 2009 and all of the sudden there’s no cash to lend. Companies with great opportunities simply couldn’t get a buck to put them into practice. Even though prices of solar panels have dropped (technology has advanced to make costs much more affordable), there still just isn’t a way for most companies to play this game… until now!
Ministry of Finance Writes a Blank Check
It’s a bit ironic that one of the biggest pieces of news to hit the markets Thursday, came in the form of a press release that was only available in Mandarin. But thanks to the modern marvel of Google Translator, I was able to read a rough paraphrase of the news item. And the text was pretty surprising… We’ve got a serious turn of events here!
We’ve heard about stimulus plan number one, and stimulus initiative XYZ to the point where the word stimulus has lost its meaning. Heck, I’m sitting here yawning just hearing the word.
But the Chinese Ministry is actually putting action to words by offering to pay $3 per watt for large solar installation projects. Now remember, these projects typically cost $5 to $7 per watt. Since we’re talking about “large” solar projects, one can only assume that these project use economies of scale to get the best price (near $5 per watt).
So essentially, China is picking up the tab for 60% of the cost of solar installations. That’s HUGE! It means that our theoretical $250,000 project is now costing businesses $100,000. And still the same energy savings are in place! Instead of 4 years, it now takes less than 2 years to pay for itself.
When you begin to understand the magnitude of this announcement, its actually only surprising that these solar companies didn’t jump more than 45%. In the coming weeks I expect that markets will continue to absorb this news and as a result solar stocks will move higher…much higher!
Credit conditions are beginning to ease (just a bit). China is putting actual cash on the table, and the US has passed several bills that should significantly support purchases of alternative energy systems. All of these forces should result in a long-overdue rebound for the solar industry and significant profits for nimble investors willing to put capital to work in this sector.