Why Solar Stocks Have Immense Upside Despite Current Pessimism

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Includes: CSIQ, JASO, RUN, SCTY, SPWR, SUNEQ, TSL, VSLR
by: Sneha Shah

Summary

The Solar industry is highly volatile and investors need to play their cards right.

Though the sector is highly promising, most companies’ stock prices do not reflect potential growth.

First Solar gave stellar returns in 2015, while for SunEdison it was a dark year.

Quality solar stocks should perform well in the coming year.

It has been an extremely difficult time for investors in the solar market, owing to the huge fluctuations being seen in this energy sub-sector. According to IEA, solar will generate ~16% of global electricity by 2050 from less than 1% now. Though the solar market looks very promising and possesses immense potential, it is not being reflected in solar stock prices. Investors have become wary of their investments in the solar sector as it has become extremely volatile specially in the last year. The general decline in oil prices has been hitting this sector hard and has been a major reason for the stock price declines.

Some major companies such as SunEdison (NYSE:SUNE) have also seen huge falls due to management overreach, while others such as SolarCity (NASDAQ:SCTY) are being questioned over their business models. However, volatility is not new to the solar sector and investors who have managed to buy during the downturns have reaped handsome rewards. As is natural for a new industry, some companies are going to sink. Even Sunpower (NASDAQ:SPWR) which is one of the leaders in the industry now was said to be near bankruptcy by the Total (NYSE:TOT) CEO. The important thing to remember is that solar will keep growing at high double digit rates and some stocks are going to be multibaggers.

Why has the market fallen so much

The major reason why the stock prices of solar companies are falling is the declining oil prices. Crude oil prices have plunged by more than 60 percent since June 2014. Brent Crude is now trading at around ~$30-$35 a barrel, after falling near the $25 level. However, one must remember that solar energy and crude oil do not compete directly. Oil is not used to generate power as it is too expensive and will continue to remain too expensive to generate power, except for limited uses. Solar mainly competes with gas and coal in the field of generating electricity. Steep decline in solar costs have made it competitive with both coal and gas in a number of countries around the world. It is expected that solar would become cheaper than even coal prices by 2020, as technological improvements keep reducing solar costs.

Click to enlarge

Brent Crude Oil Spot price Chart for the last 5 years

Source: Yahoo Charts

While Europe is already facing a slowdown, another important reason for the fall in the solar sector is the sluggishness of the Chinese stock market. Major countries that export to China are suffering from low levels of demand in China. This has led to a general slowdown worldwide. China has played an instrumental role in revolutionizing the solar industry. Now investors are concerned that the general economic malaise might also negatively influence the solar sector and this is affecting the overall sentiment in the industry.

Major stocks that have been falling sharply

The solar stock prices have shared a general declining pattern in the last one year. Though the returns have been good, the prices have not increased in sync with the future potential of the solar industry. Though oil prices and a slowdown in China have definitely played a major role in the average stock performance, some company specific matters also led to low stock prices for some major stocks like Trina Solar (NYSE:TSL), JA Solar (NASDAQ:JASO) and SunEdison.

Click to enlarge

1 year Stock performance of major stocks

Source: Google Finance

Since Trina Solar and JA Solar received privatization offers from their management, their stock prices have been stuck under $10-11 range. While major stocks saw their prices jump after ITC renewal news, TSL and JASO continued to remain range bound. For SunEdison, the last year has been one of the worst in the company's existence. The company was considered as the leader in the renewable energy space after its yieldcos were listed. However, the stock price has been battered since the company faced a debt crisis. Though I believe the company still has the potential, it seems the street has lost all the confidence it had in the stock. The company's decision to acquire Vivint Solar (NYSE:VSLR) was a dampener for the company's fortunes. Though this is not the first time that the solar industry has seen a leader become a laggard, it shows the volatility of the industry. There have been numerous Riches to Rags stories in the solar industry.

Why Solar Industry is in a sweet spot

The solar industry is poised to grow in double digits, with the world realizing the major role that solar energy can play in fighting climate change. ITC extension is a positive signal for the growth of solar energy in USA and will make investors confident about solar. According to SEIA solar power will hit 95GW mark by 2022, enough to power 19 million homes. This will tantamount to offsetting emissions from 26 coal power plants, almost equal to 100 million metric tons of CO2 annually. This will in return increase employment opportunities, while making the world a cleaner place to live in. Major emerging economies have started resorting more to cleaner fuels, thus cutting their dependence on dirty fossil fuels and reducing harmful emissions. Solar energy will become the major source of energy going into the future and investors would do well to invest in this industry.

Some of the better performing stocks

First Solar has shown extremely good stock performance when compared to peers. The stock has returned more than 60% in the last one year. With rapidly declining costs and improving efficiency, the company has forecast $4-4.50 in earnings per share on $3.9-4.1 billion in sales for 2016. It expects to sell 2.9-3 GW worth of solar panels in 2016. The company will also benefit from its leading position in USA and Asia. The stock is currently trading at ~$68 and has a market capitalization of $6.9 billion.

My list of stocks that should perform well in 2016

First Solar, Sunpower , Canadian Solar (NASDAQ:CSIQ), Sunrun (NASDAQ:RUN) and SolarCity are the major USA listed stocks that will benefit ITC extension. Other utility installers should also get benefited, since utility installations are expected to increase by more than 70% in the next five years. Other than these, major module suppliers in China having large capacities like Trina Solar, Jinko Solar and JA Solar should also benefit as a result of increasing demand.

The solar market is extremely volatile and highly unpredictable, but with high risk comes high reward. I would thus advise investors to build positions in quality solar stocks, keeping the risks in mind.

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

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.