Solar Stocks Break Down Yet Again

Speculative stocks typically get hit the hardest during corrections in the stock market, and solar stocks definitely qualify for a beating. In the past 4 days of selling, TAN, the Claymore/MAC Global Solar Energy Index, is already down 10%. Solar stocks have been big laggards this year as TAN is now back to even on the year. See chart below:

As a group, solar stocks have gone nowhere this year

*Charts created using TeleChart

When I last did a round-up of solar stocks, they had suffered greatly during the brief sell-off that began the month of October but most remained comfortably within trading ranges. The current correction has caused some serious breakdowns that will likely take most stocks in the group much lower before the carnage ends. Rather than post a bunch of charts, I am just listing stocks by their position relative to the important daily moving averages: 50DMA and 200DMA.

Above 50DMA and 200DMA (still trending upward)
Trina Solar Ltd. (TSL)

Below 50DMA only
Yingli Green Energy Holdings (YGE)*, Canadian Solar (CSIQ)*,

Below 50 and 200DMA
JA Solar Holdings (JASO)*, GT Solar International (SOLR), LDK Solar (LDK), SunPower Corporation (SPWRA)*, First Solar (FSLR), Energy Conversion Devices (ENER), Solarfun Power Holdings (SOLF), China Sunergy (CSUN), Suntech Power Holdings (STP), ReneSolar (SOL), Evergreen Solar (ESLR), MEMC Electronic Materials Inc (WFR)

*still within trading range

TSL remains the biggest winner in this group. However, what sticks out the most from this list is that most solar stocks are not only breaking down from important technical levels, but also have already broken down below (multi-month) trading ranges. The fresh disappointment in FSLR’s earnings almost guarantees that these breakdowns will continue in the near-term. TAN should also break down below its 200 DMA.

I started scaling back into SPWRa during this selling. In a quarter where most companies are still reporting tremendous year-over-year declines in revenue, SPWRa reported a 56% increase. These shares still look exceptionally cheap to me and are pricing in the rough waters ahead. I am sticking by STP for now, but I am wary of earnings. The November speculative calls on SOL are likely a complete loss. I remain very intrigued by TSL, and I eagerly await the company’s next earnings report. WFR proved once again that it cannot escape its operational issues. I will not be surprised if ESLR breaks its March lows and trades under a dollar by year-end. Finally, I am still net short FSLR, but I will likely scale back some of the position amidst the post-earnings wreckage. As expected, gross margins continue to decline for FSLR. For some reason, the market continues to be surprised by this decline although FSLR telegraphed this decline at its analyst’s day back in June.

Be careful out there!

Full disclosure: TAN and positions explained above.

Comments

[Zenfar:]

Good update!

Oct 30 11:34 AM

[spiritcraft:]

TSL seems to be crushing the competition and seems to be run like a well oiled machine. I think TSL is actually trading at a forward PE of around 7 on 2010 eps. With planned expansion, 2011 should put EPS over $6.00

Oct 30 12:28 PM

[Jade Queen:]

The German team won the solar house competition on the mall in D.C. with SunPower on the roof. At least one of the other teams used SunPower as well. It was interesting to see whose products were on these houses. I looked at the information on Renewable Energy World, where you can go to watch some of the videos and look at some of the results.

I appreciate the analysis.

Oct 31 11:14 AM

[Steven Ward:]

Most solar stocks willprobably tank over the next 6 months. The raw materialpolysilica is down in price showing no robust demand.

Spain capped government funds this year on solar implementation and Germany is next. Merkel has decided that the German tax payer has had enough of the "experiment" in green.
Spain and Germany are the two biggest markets for solar and that's now kaput.

Oct 31 12:34 PM

[Road Runner:]

I totally agree with your analysis.

SunPower (SPWRA and SPWRB) is one of the winners in this earnings cycle, though the stock price doesn't reflect it. Note that the big gain in sales and earnings this quarter came from the "components" business which is the home and small business market where financing is not as big of a deal. It's "systems" business did take a hit because financing is still an issue.

Good time to buy SunPower with its stock price lower than it should be. It's "components" business, where it has a big advantage because of it's high efficiency cells, will continue to grow at a brisk pace. I like the "components" business because it doesn't depend on big financing, building power lines, getting land permits, getting utility company corporation, etc. as the “systems” business does. In other words, there is no natural "throttling" on the speed of growth in the “components” business. It could “take off” when the world economy is fully recovered.

Oct 31 01:17 PM

[Road Runner:]

Another thing about SunPower. They will be capacity constrained in the first half of 2010. If fact, they plan to use another solar company's panels for some of their big projects in 2010. It's hard to believe they will be capacity constrained in 2010 with the world-wide glut in solar panels lasting through 2010, but they emphasized that in the conference call.

Being capacity constrained means they will be getting the most out of capital expenditures and operating expenses. It may also help keep up margins, though I don’t have proof of this. It also gives me confidence that SunPower will emerge from the coming solar consolidation as one of the powerhouses. SunPower will be able to absorb other solar company’s best assets for good prices – think Cisco, Microsoft, Google, Oracle, etc. who regularly buy small and/or struggling companies that have some valued technology.

Oct 31 01:32 PM

[Road Runner:]

I agree with you that STP is a question mark. I don't know where this company is going. I'm just holding my shares to see what happens.

Oct 31 01:37 PM

[Jack Yetiv:]

HERE IS A COMMENT I WROTE IN RESPONSE TO ANOTHER SOLAR ARTICLE ON SA ON SEPT. 23, 2009, in which the author argued that FSLR was worth $150+ and that TSL (a company which I like a lot but which is probably fairly priced in the $30-$35 range) is worth more than $35:

First, I think your metric of cost/watt of panel is the WRONG metric to use. The correct metric is cost per INSTALLED watt. Since you have to install almost twice as many FSLR panels to equal the output of a silicon panel, your land cost is going to be substantially higher, as will be balance of system costs such as racking, wire, labor, etc. When you look at cost per INSTALLED watt, the cost delta between thin-panel and silicon-based panels is much narrower.

In addition, we KNOW that silicon-based panels will produce power for 30 (and more) years--because we have panels of that age out there. We do not have any 30-year-old thin-film panels out there so their longevity is more of a question in my mind.

Also, the rooftop market is almost off-limits to thin-film panels because such panels require almost twice as much roof space.

Given the foregoing opinions which I hold, I disagree that FSLR is good value at $150/share. I do not doubt that FSLR sales will grow significantly in the next few years because overall solar panel sales are going to increase trememdously.

But I will bet you that by the end of this year--if not sooner--FSLR's 50%+ margins will be history, and I will also bet that its margins will be in the 30's in 2010. If margins are cut in half, FSLR can double sales and yet not make any more profit. That outcome does not justify a PE of approx 20, which is where FSLR is right now.

As to TSL, I like it a lot (see my articles on TSL last year, before others began touting it), but am concerned about buying it at $35. Although there is upside potential, I think downside risk is significant as well.

I THINK THE ABOVE COMMENT STILL APPLIES. Obviously, the market now agrees with me that FSLR was overpriced at $150. We'll see what happens with TSL after earnings. As much as I like the solar industry and the potential it has to solve a lot of our problems, it has largely become a commodity business and I believe 15-25% gross margins and 10-15% operating margins will be standard fare in this business going forward.

Jack Yetiv

Jack Yetiv

Oct 31 07:01 PM