We believe that, at the minimum there are trading opportunities emerging in the solar sector, which is likely to be very close to a multi-year bottom. While it will take the industry quite some time to recover from last year's near 50% fall in average selling price [ASP], demand keeps on increasing, not enough for the solar stocks to come back with a roar anytime soon, but enough to stop the rot.
While the cost reductions and efficiency improvements in cells and production processes are not nearly enough to keep pace with the large fall in ASP, increased market demand, write-offs of inventories, inventory reductions, postponement of investment in new capacity and something like an industry shake-out does provide more support for stock prices that are once again approaching battered lows.
Indeed, Suntech (STP) apparently sees the industry back in the black in the second half of this year. We had a few false starts in the stock prices, something for which we warned quite a few times, but we expect an imminent bounce off of these lows once again. It doesn't make much sense for the big solar names to fall much further, as they will quite likely be survivors of a shake out (there are already quite numerous casualties, especially in Germany).
Beginning with Suntech , this is probably the least sold-off solar stock and it's also still quite significantly above the lows of a few months ago.
On the opposite end is First Solar (FSLR), this is the most sold-off solar stock (with an RSI in the low 20s) hitting multi-year lows. The slide in this once Wall Street darling is awe inspiring, but we're not at all sure that even a trading position is warranted here. First Solar is simply the victim of a reversal in fortunes that made the company grow so fast earlier.
The point is, First Solar, while producing cells that are less efficient in converting sunlight into electricity than the main alternative technology (based on crystalline silicon) enjoyed a significant cost advantage when polysilicon, the raw material used in the alternative technology, was very expensive.
But that cost advantage has been completely eroded, and the end of this reversal in fortunes is not in sight. So despite the terrible oversold technical conditions, we'll stay on the sidelines with this one, as we feel there are other solar stocks offering better near-term opportunities.
One of these must be Jinko Solar (JKS). Its stock is hitting a level where it bounced several times before, and while not nearly as oversold as First Solar, we feel a bounce is due.
While we were skeptical about solar stocks in the recent past because it simply takes time to absorb a 50% fall in ASP, we were always of the opinion that the future is bright for the industry. Indeed, there are more and more areas where solar is able to compete with grid prices. While costs continue to fall year after year, those areas will only increase. We think we must be very near the bottom of the market right now.