Fundamentals For Solar Energy Look Great, But Companies With The Right Strategy Are Lacking

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 |  Includes: KWT, TAN
by: Simit Patel

Alternative energy has been a growing focus of mine over the past few months, and so I've been looking for the right uranium, solar, and wind energy stocks to add to my portfolio as buy and hold value plays. Here is a short summary of my analysis of the current situation in the solar energy market:

1. Solar ETFs have been some of the worst performing ETFs in 2011 -- which of course piques my buying interest quite a bit. While I consider it quite likely these stocks could continue to go further down, I don't think the underlying fundamentals have changed; concerns over peak oil and the need to transition away from fossil fuels are only growing, and players like China and Google are still viable candidates for being the "smart money" that can bring the demand to push prices higher -- demand upon which small-time players like individual investors can piggyback on. China's domestic demand for solar energy continues to grow, as does Google's interest solar as evidenced by its recent KKR deal.

2. But while solar as a sector is set to grow for years and will help the world transition away from fossil fuels, not all parts of the solar value network are the same. Indeed, I believe the value network is still evolving rapidly as new technologies -- particularly those related to storage -- continue to come on to the scene. However, one trend that I think is particularly important, and will drive much of how the value network changes and profit opportunities are created, is the rapidly declining price of solar panels. As solar panels continue to fall in price, I suspect profit opportunities will transition to firms that specialize in installation and the development of custom solar solutions. In other words, companies that are more service-oriented and customer-relations centric rather than pure product makers.

And here is where I come to a stand still, and why I have yet to make an investment in the solar sector. There simply isn't a company I've found that has the strategy I'm looking to back as well as a stable balance sheet and competent leadership. The solar ETFs, KWT and TAN, could be viable ways of playing the entire sector, though I don't think they have the right kind of companies -- companies pursuing the strategy I've outlined in this post -- in their portfolio. And so, I'm still on the sidelines when it comes to solar, and will continue to focus on uranium stocks and nuclear energy which I think has more companies with viable strategies and a more mature value network safer for investing as well.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.