Solar Stocks Shine in January

by: Hard Assets Investor

By Matt McCall

The Dow may have just logged its best first month of the year in 14 years, but solar stocks have outshined even the overall market in January. First Solar (Nasdaq: FSLR), the world's largest solar panel manufacturer, rose more than 18 percent month-over-month, while Trina Solar Ltd (NYSE: TSL), a Chinese-based integrated solar power products maker, rose 11 percent. Other solar stocks on the rise include SunPower Corp (Nasdaq: SPWRA), which increased nearly 5 percent in January, and Chinese-based Suntech Power Holdings (NYSE: STP), which rose 6 percent.

Still, solar energy stocks have remained volatile over the last two months, trading as usual in a pattern similar to that of crude oil futures. That's because the cost of converting to solar from traditional fossil fuel energy sources remains high; thus, the more we pay for a barrel of oil, the more attractive clean energy becomes. Now that oil's flirting with $90-$100/barrel, solar has begun to regain some of its favor with investors.

On top of oil's recent rally due to the Egyptian conflict, two other major events have helped push solar stock prices higher over the past two weeks.

Government Involvement

For starters, on Friday [2/4/11], the U.S. Department of Energy said it would spend $27 million on a new effort to reduce the cost of solar power by 75 percent by the end of the decade. Currently, the cost to install photovoltaic solar panels remains about 22 cents per kilowatt per hour—lower than in the past, but still a substantial barrier compared with traditional energy sources. But if the government reaches its goal, that cost would drop to just 6 cents per kilowatt per hour.

Of course, exactly how the government intends to lower costs so dramatically remains to be seen. Will the mandates eat into the margins of the U.S.-based solar companies? Or will the money be used as subsidies to help improve the technology of the solar companies?

Another major factor driving solar stocks higher comes out of China, where an oversupply of polysilicon—a key ingredient in solar panels—has been flooding the market. Officials have floated new regulations that could help ease the oversupply situation, which would help margins of the related solar companies and boost their stock price.

China has fostered a thriving, if small, solar industry for years, and its lower costs have helped Chinese companies make major inroads into the U.S. and Europe. Chinese companies account for two-thirds of the global solar market, with one company, Suntech, selling one-quarter of all solar panels in the U.S. in 2010.

Investing In Solar Via ETFs

Currently two ETFs concentrate solely on the niche solar power industry: the Guggenheim Solar ETF (NYSE Arca: TAN), and the Market Vectors Solar Energy ETF (NYSE Arca: KWT). Both are equities ETFs; you can't trade futures on sun power (at least, not yet).

Guggenheim's TAN consists of 34 stocks from around the globe, although it has a heavy concentration on the U.S. (42 percent), China (27 percent) and Germany (17 percent). The largest holding in the ETF is U.S.-based First Solar (Nasdaq: FSLR), which accounts for 21 percent of the entire ETF.

This heavy concentration on one stock will result in TAN relying on the movement of FSLR to drive long-term trends, and this lowers the diversification that is often a selling point for ETFs. The annual expense ratio for the fund is 0.65 percent.

Van Eck's KWT, on the other hand, is composed of 30 stocks in the sector, with FSLR once again the No. 1 holding. This time, however, FSLR only makes up 10 percent of the entire portfolio; MEMC Electronic Wafers (NYSE: WFR) also accounts for 10 percent and Trina Solar comes in at 9 percent. KWT also has less focus on the U.S. (29 percent); China, in fact, is its top country, at 30 percent, with Germany and Taiwan making up another 17 percent and 14 percent, respectively.

The expense ratio for KWT is capped at 0.65 until 5/1/11.

One benefit of KWT is its diversification away from overexposure to one stock (FSLR), but other than that, the two ETFs are very similar. And although KWT has much smaller assets under management than TAN (KWT has $25 million compared with TAN's $143 million), it has performed marginally better than its larger cousin over the past year, although both have dropped in value. KWT has lost 17 percent to TAN's 20 percent.

Looking Toward The Future

Short-term volatility may be here to stay for solar stocks, but looking out a decade—which is now a long time for most investors—the future remains bright. However, the question remains: Which stocks will be the winners? Only time will tell the true story.

In the meantime, if you want exposure to the sector, there are individual names such as FSLR or STP and the ETFs that lower the company-specific risk. It comes down to what risk level you are willing to take as an investor when deciding on the appropriate investment strategy for the portfolio.