Judging from the performance of First Solar's (FSLR) stock in the last twenty-four hours, the hype is back for solar stocks. But should investors rush back into the solar sector?
It depends on the investment horizon of each investor. Short-term investors may want to trade the sector, as it is heavily shorted -- First Solar's short interest stands at 36.7 percent of the float. Long-term investors may want to stay away.
In an article "3 High Risk Trades to Avoid," we warned investors about the perils of momentum investing, a strategy based on hype about an investment theme, a new product or a new industry that captures and captivates the investor mind -- at times when money is cheap. We did remind investors that the momentum crowd hyped with the potential of the telecommunications and networking industry in the late 1990s, fell in love with stocks like Cisco Systems (CSCO), Ciena Corporation (CIEN), JDS Uniphase (JDSU), and Ariba Networks (ARBA), and suffered hefty losses once the hype faded.
Here we take a closer look at the fate of another momentum crowd hyped by the potential of sustainability industry in the early 2000, buying up the stock of alternative energy companies.
For years sustainability investing was confined to the venture capitalist community only, which relied heavily on government support to make money. In the last decade, sustainability investing extended to mainstream investors, as scores of start-ups in solar energy, wind energy, and geothermal energy went public. First Solar, for instance, manufactures and sells photovoltaic systems and solar modules; SunPower Corporation (SPWR) works together with utilities to develop solar power plants; and Hoku Scientific (HOKU) and MEMC Corporation (WFR) are silicon suppliers. Beacon Power Corporation (BCOND) makes flywheel energy storage systems, while Western Wind Corporation (OTC:WNDEF) operates wind farms. US Geothermal Inc. (HTM) and Ormat Technologies (ORA) build geothermal plants.
In the beginning of the decade, most of these stocks popped as momentum investors believed that the prices of traditional energy, like crude oil, would reach for the moon and that solar panels and windmills would grow like grass in early spring, chased after them. By the end of the decade, the same stocks crashed, as neither belief proved to be true.
Solar Energy Companies
5 yr performance
Ascent Solar (ASTI)
Arise Technologies (OTC:APVNF)
LDK Solar (LDK)
Source: Compiled from data taken from Yahoo.Finance.com
The bottom line: When momentum fades only profitable companies will survive and thrive, but there doesn't seem to be any in the solar energy industry.