Solar stocks are going to get burned as austerity on both sides of the Atlantic results in slashed budgets slashed and reduced solar incentives. Regardless of the poor merits of long-only positions in the solar industry, investors might still be able to construct defensible market-neutral positions by initiating long positions in better solar stocks and taking short positions in weaker solar stocks. The resulting long-short position would function as a long straddle on the solar industry, and would profit if the industry was further gutted by macroeconomic forces.
In a prior article I laid out conditions in which solar panel investing would reap risk-adjusted returns. I later focused this analysis on real world data provided by the California Solar Initiative. Many of the photovoltaic systems which were tracked for performance based incentives were made by familiar, publicly-traded solar companies. Their monthly output was seasonally adjusted and is presented here:
Monthly Weighted AVG of SA kWh/Nameplate | ||||||
Ticker | Company | Year 1 | Year 2 | Year 3 | Year 4 | All Years |
SunPower | 142.3 | 143.8 | 142.2 | 132.5 | 142.5 | |
Canadian Solar | 137.3 | 161.7 | 141.9 | |||
Yingli Energy | 137.4 | 144.8 | 135.8 | 134.8 | 138.6 | |
Trina Solar | 134.8 | 142.4 | 122.5 | 137.0 | ||
Suntech Power | 134.8 | 139.4 | 140.3 | 145.9 | 136.5 | |
First Solar | 121.1 | 129.3 | 137.3 | 123.6 | ||
Drilling down on individual manufacturers can lead to small sample sets. Unusual weather patterns or location-specific issues can create noise in the data which is clearly seen between output ages. The data for First Solar's units were collected from installations in 13 different cities across California. It appears that the output per kW on a unit's nameplate has been lower for First Solar than its competitors.
There are also positive surprises in this data. Yingli Energy is sometimes lumped in with low-quality manufacturers of photovoltaic solar cells, but this is not supported by the data. Yingli Energy systems seem to hold their own.
Long and Short Selection
Consider the following financial metrics:
Ticker | P/E | P/S | P/B | Debt/Equity |
CSIQ | 0.08 | 0.31 | 1.79 | |
STP | 0.14 | 0.47 | 2.4 | |
YGE | 0.24 | 0.68 | 2.76 | |
TSL | 0.28 | 0.49 | 0.91 | |
SPWR | 8.69 | 0.43 | 0.5 | 0.44 |
FSLR | 0.52 | 0.44 | 0.27 |
Most of these firms do not have calculable price-to-earnings ratios since they have booked losses in the past twelve months. Since these are high-tech companies, the price-to-book ratio is ignored.
Yingli Energy and SunTech Power are highly leveraged while First Solar is the most expensive stock in this grouping. There are long-dated puts available on YGE, STP, and FSLR shares which can serve as cover for longs in this industry.
Investors can buy SPWR, TSL, and CSIQ shares as long components of the hedged position. The performance data demonstrates that they manufacture systems with consistent output. Investors also have the opportunity to buy long-dated calls which are also traded for these shares. For each of these stocks investors could select between buying beaten-down shares or buying calls on these solar stocks.
The resulting position will be straddle-like, and will pay-off for big solar industry moves in either direction.
Disclaimer: This article was written to provide investor information and education, and should not be construed as investment advice. I have no idea what your individual risk, time-horizon, and tax circumstances are: please seek the personal advice of a financial planner. This article uses third-party data and may contain approximations and errors. Please check estimates and data for yourself before investing.
