By Brendan Coffey
You’ve probably heard something about three well-known solar firms that declared bankruptcy this year. Here in Massachusetts, where I live, Evergreen Solar declared bankruptcy in August after finding itself nearly half a billion dollars in debt, less than three years after its stock traded over 100 a share. In Oregon and New York, recent Intel (INTC) spin-off SpectraWatt also went under and its assets were auctioned off last week. Most infamously, California’s Solyndra shut down two years after receiving $528 million in Department of Energy loans for its California manufacturing facilities.
So what happened to solar? In short: China. In 2007 and 2008, when hopes for solar were running high along with the performance of solar stocks, the supply of polysilicon, the primary feedstock for solar panels, was in short supply. That made companies like Evergreen, which had a novel way of manufacturing cells to maximize use of polysilicon, attractive–as late as February 2008, Evergreen’s shares were over $100. The shortage of polysilicon also made investments in manufacturing facilities for SpectraWatt and Solyndra seem reasonable.
Make no mistake: no one in the energy industry was expecting the shortage of polysilicon to persist (it is made from readily available sand, after all). But no one expected the reversal from shortage to surplus to happen so swiftly. The number of polysilicon producers in China, for instance, increased from just seven in 2008 to 70 by 2010, according to research firm Trefis Group.
China, with its artificially weak currency, was able to hammer down polysilicon prices and, in turn, solar panel prices. For the typical Chinese-based manufacturer of panels, production costs fell by half in just three years, helped by low labor costs. Even with all of that, it is quite possible SpectraWatt and Solyndra (Evergreen having a larger issue with it’s unique technology) may have survived the much swifter-than-expected price drop, but for the persisting recession.
For the first time in memory, the steep drop in solar prices in 2011 has not generated the leap in solar demand that usually occurs. Last year for instance, demand shot up over 100% after the steep drop the industry saw in 2010, according to the cleantech group at Jeffries & Co. This year, demand is still weak even as prices soften.
This doesn’t mean solar is dead–its falling prices have made it a more viable option to grid-generated power. The demon isn’t necessarily government subsidies either–an International Energy Agency report out this week notes that most government subsidies go to petroleum.
There are still plenty of advantages that mean solar will rebound eventually: for one, its energy source is free. Plus China and Germany, two of the world’s main solar markets, will almost certainly boost their solar usage–China to meet its seemingly insatiable energy demand, and Germany to help fill the void left by retiring its nuclear plants by decade’s end.
And the simple fact is that as any industry becomes more competitive, companies are going to lose, while others will win. But will solar manufacturing have a U.S. base in the future? That’s more difficult to say. Perhaps one indication came from the SpectraWatt asset auction last week. The winner of its full solar panel production line for $5 million: Chinese manufacturer Canadian Solar (CSIQ), which reportedly plans to ship the production line lock, stock and barrel, to China.
No doubt some of you are wondering if now is a time to buy into solar. I think that no matter what form the solar market rebound takes, it will require time, as the charts of even the best solar stocks are firmly bearish. Even once solar stocks start recovering, there will be a lot of pent-up selling from those who bought and held when solar was exceptionally strong in late 2007 and 2008.
I’ve been out of solar stocks for nearly a year. Our last solar stock in the energy portfolio was sold in November 2010 (Renesola (SOL), at a 54% profit). To get back into solars, I’m going to need to see both a turnaround in the alternative energy sector–which we may be seeing glimmers of as I write–and then a bull move in specific solar stocks. We’ve generally done well with energy investments thanks to our approach of finding fundamentally sound companies that have bullish trading charts. Rather than bottom feeding, we wait for a confirmation that a specific stock has bottomed and turned higher.
This isn’t a new or particularly clever approach. I first learned it from some savvy commodity futures traders who rightly recognized that waiting for bullish confirmation of a turnaround was a way to dramatically cut the risk of buying a security. Sure you give up the lottery ticket of buying a stock at its all-time low and enjoying an eye-popping profit. But then again, very often what you think must be the bottom isn’t.
So how do I bottom feed for stocks? I don’t. Let others take the high risk of bottom feeding; I prefer to wait until it’s clear that a rebound is underway. This system got us into that profitable Renesola position last year and kept us from ever getting into Evergreen Solar even as it seemed cheap at 50 just a few months after it fetched 100 a share. My rule of thumb is that you can still capture 75% of the profits, while surrendering 75% of the risk, simply by waiting for the stock to get going before you hop on.
While we wait for solar to rebound, we’ve been selectively investing in strong fossil fuel stocks and a couple of alternative energy stocks. But recognizing the dangers in the market, we’ve kept a good deal of our capital in cash (right now, we’re at 60% cash).
Even as we keep our powder dry, there are some macro developments I’m following. The most immediate trend we’re seeing is the push toward more efficient and cleaner cars, trucks and industrial equipment really starting to generate some exciting stock investments.
One related auto stock that still looks good–although its chart is showing some weakness now–is Polypore (PPO). Best known for making the high-tech battery membranes used in the iPad, its main business is membranes and separators for high tech automobile batteries–and it has been a market leader for the past year.
More broadly, the biggest trend I see is that despite all of the troubles we’ve had and are having–from the European debt crisis, which is roiling the continent’s economy, to the sluggish, perhaps stalling, recovery here in the U.S.–energy demand continues to grow. It may surprise you to know oil prices are well up, on an average price year-to-date, over 2010, and even this week are just about where they were one year ago, around $80 a barrel.
That price strength reflects the reality that world energy demand continues to grow. The U.S. Energy Information Agency released a report last week projecting that world energy demand will rise 54% by 2035, compared to the 2008 benchmark. Projections can be squirrely things, but such growth isn’t out of line with the past. From 1990 to 2008, world energy demand grew about 42%. Because you and I are likely conserving energy and driving more efficient cars, Western world energy demand isn’t going to rise very much in the next two decades.
It’s the developing world, China and India in particular, that will drive this next leg of growth in energy demand. According to the U.S. Energy Information Agency, those two countries alone will drive half the world’s growth in energy usage by 2035. And unlike the past decades of growth, the future will be heavily reliant on new forms of energy, like solar, as well as unconventionally tapped natural gas and oil from places like North Dakota, the Arctic, western Africa and probably some places none of us have heard of by companies that have yet to go public.