Ever since the dotcom crash, I have been leery of growth stocks trading at insane multiples. Bubbles are real, and they have a way of popping. Bubbles may last a long time, but eventually they explode. That's why I've never been a fan of solar stocks. Here's why, and some stocks I think are destined to die.
In my opinion, solar power will never achieve global acceptance as a truly viable long-term power source. Currently, solar produces less than 0.1% of the world's energy usage. Sounds like a lot of market share to grab, right? The problem is that if you talk to homeowners and CEOs, they'll tell you the same thing: even with government subsidizing the purchase of solar equipment, solar does not pay for itself over the long haul -- and that is with government subsidies. America even has the most anti-oil Congress and President in ages. With both money and politics in solar's corner, there has been little to advance its cause or growth.
Some may laugh, and tell me to think long term. The problem is that over the long term, even if solar overcomes its hurdles and becomes more widely accepted, the technology and equipment will be commoditized. You don't want to own companies that produce a commodity because prices are continually driven lower, margins get squeezed, and growth shrinks.
So I suggest avoiding solar stocks and if you hold these stocks in your porfolio, you may want to exit sooner rather than later.
STR Holdings (NYSE:STRI) just reported sales that were down almost 50% year over year. The company had to sell its quality assurance unit to raise cash. It carries $235 million in debt, and has only generated $9 million of free cash flow in the TTM. By losing the $150 million in revenue from the sale of the assurance unit, it now must rely on its solar business in its entirety. I think STR is a possible short.
JinkoSolar Holding Company, Ltd (NYSE:JKS) is based in China, which is a red flag just to begin. I'm highly skeptical of Chinese stocks, whose companies are not required to have the same controls and procedures that domestic companies have. There are no SEC filings, and what little financial data exists doesn't look good, such as negative free cash flow of over $100 million in 2010. This may be a good short.
The same goes for JA Solar Holdings Co, Ltd. (NASDAQ:JASO) Negative cash flow, Chinese company, no SEC filings, huge increase in accounts payable, more debt than cash.
I don't care for SunPower Corporation (SPWRA). Despite $100 million of net cash on its balance sheet, the company had big negative cash flow numbers in 2008, and 2009, and did see some positive free cash flow last year. However, its net margins are under 1%, and while it grew revenue by 50% in 2010, its SG&A grew by almost 60%. Possible short, or at least a sell.
If you want to make money in energy, invest in oil producers. The world runs on oil and always will. Conoco-Phillips (CPO) had $17 billion in cash flow in 2010, against only $1.2 billion in interest and $27 billion in debt. ExxonMobil (NYSE:XOM) generated a whopping $48 billion in cash flow against a tiny $260 million in interest, and $12 billion in debt. Even BP, despite the Gulf spill, generated $13.6 billion in cash flow against $45 billion in debt, and they usually run $27 - $40 billion in annual cash flow. Chevron (NYSE:CVX) produced $31 billion in cash flow against only $11 billion in debt. And none of this even mentions the billions of cash these companies have on their balance sheets.
Each stock also offers steady, growing dividends. BP reinstated its dividend to a 3.8% yield, Chevron pays 3.1%, Conoco yields 3.6%, Exxon pays 2.3%. The compounding of reinvested dividends also helps turbocharge returns over time.