Will Outsized Solar Stock Returns Continue?

by: Harris Roen


Solar stocks have been on a tear for the last year.

Fundamentals of top performing solar stocks point to a correction ahead.

Long-term, there is room for growth in solar stocks.

Any way you slice it, solar investing has been on a tear for the last year. Of the 69 solar stocks that the Roen Financial Report tracks, three quarters are up for the year. On average solar stocks have gained 85% for the year, with 60% of solar companies up in the double digits. What is most impressive is that the top 17 solar stocks are all up in the triple digits, and one, Canadian Solar Inc. (NASDAQ:CSIQ), is up 903%!

This article will look at who these outsized performers are, what is going on with them, and where this highflying sector may go from here.

Top Solar Companies

Company Market Cap Location Product/Service
Altair Nanotechnologies, Inc. (NASDAQ:ALTI) micro Reno, NV Energy storage
Amtech Systems, Inc. (NASDAQ:ASYS) micro Tempe, AZ Semiconductor manufacturing equipment
Canadian Solar Inc. small Canada Solar cells and modules
China Sunergy Co., Ltd. (NASDAQ:CSUN) micro China Crystalline silicon solar cell and modules
Daqo New Energy Corp. (NYSE:DQ) micro China Raw polysilicon, silicon cells and PV modules
First Solar, Inc. (NASDAQ:FSLR) small Tempe, AZ Thin-cell PV cells and modules
GT Advanced Technologies Inc. (GTAT) micro Merrimack, NH Equipment used by solar and LED manufacturers
Solarfun Power Holdings Co. (HSOL) micro China Vertically integrated, raw materials to finished product
JA Solar Holdings Co., Ltd. (NASDAQ:JASO) small China Solar cells, modules and panels
JinkoSolar Holding Co., Ltd. (NYSE:JKS)/td> micro China Solar wafers, cells and modules
Real Goods Solar, Inc. (NASDAQ:RGSE) micro Louisville, CO Solar installation
SolarCity Corp. (NASDAQ:SCTY) micro San Mateo, CA Design, installation, financing of residential and commercial solar
ReneSola Ltd. (NYSE:SOL) small China PV manufacturer
SunPower Corp. (NASDAQ:SPWR) small San Jose, CA PV manufacture and instillation
Sunedison Inc. (SUNE) small St. Peters, MO Vertically integrated PV manufacturer; project developer
Trina Solar Ltd. (NYSE:TSL) small China Solar cells and modules
Yingli Green Energy Hold. Co. (NYSE:YGE) small China Integrated solar company

The top returning solar companies, listed above, perform a variety of products and services in the solar sector. Overall they are small companies as measured by market capitalization, and are all either U.S. or Chinese companies (even though CSIQ is headquartered in Canada, virtually all of its operations are in China). Returns for these top solar stocks are outstanding, averaging 302% for the past year.

Top Solar Stock Technicals and Fundamentals

What caused these stocks to shoot up over since the beginning of 2013? Part of the story is their stock prices were overly depressed in 2012. Solar stocks experienced a very strong downdraft due to large losses incurred earlier in the decade. As is typical in the stock market investors overshot, so many of these stocks are recovering from exaggerated lows.

Technical charting is one thing, but it is more instructive to look at some of the fundamentals. The graph above shows the average return on equity (ROE) for all 17 top solar stocks. ROE is a multiple that reflects how efficiently a company uses its resources to turn a profit.

The numbers were dismal from 2009 through 2012, but improved markedly in 2013, led by companies like Real Goods and Trina. The column in 2014 shows ROE for the past 12 months of reported data, so it can be seen that the ROE has weakened. (Because of the wild ROE fluctuation for ReneSola, data for this company was removed for the purposes of this chart.)

Debt can also be a useful measure to view how companies in a sector are faring. Debt in and of itself is not a bad thing, it is how debt is deployed that matters.

The chart above graphs two measures of debt. The blue line shows a ratio of total liabilities to total assets, which has been continually trending up. (It is interesting to note that the two smallest ratios belong to FSLR and ASYS, American companies, and the two highest, YGE and CSUN, are Chinese.) Though banks (or government in the case of China) seem willing to continue to loan to these companies, a continuing of this up trend would make me cautious.

The black line, long-term debt to total sales, is presenting a nice downtrend. This improvement is due to increasing sales for these companies. There has been a slight uptick in the most recent measure of long-term debt to total sales, so caution is advised here as well.

Average sales for these top solar stocks show a similar story. The figure above charts the average percentage change in sales from the previous quarter for the top solar companies. It is clear that sales improved markedly at the end of 2012 and beginning of 2013. Sales are still growing, but have diminished somewhat from earlier growth levels.

Where Do These Top Solar Stocks go From Here?

Considering the charts above, it is likely that these top solar stocks will back off on some of their outsized gains. Though there may be some pull back at the top level, I think the long-term trend is still up.

The chart below shows the Ardour Solar Energy IndexSM (SOLRX), illustrating that solar stocks are still way below the heady days of 2007-2008. In fact, despite the recent large gains in solar specifically, and alternative energy companies in general, solar stocks are only trading at levels they were at two and a half years ago. Though it may take decades for solar stocks to get back to the highs of 2008, and some may never get there at all, there is still plenty of room for price recovery.

In sum, the enormous gains in solar in the past year will be hard to maintain, so we expect there to be some pullback from here. Having said that, there is still much room for growth in this sector, owing to attractively low overall install costs, high levels of public interest, and continued incentives. Though a 20+% correction in this sector would not surprise me, I would take it as a good buying opportunity.

Disclosure: I am long SUNE, TSL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.