Lehman Recommends Pair Trades in Solar Stocks

In contrast to Merrill Lynch’s negative note on solar stocks today, Lehman Brothers analyst Vishal Shah says in his own note today that Germany’s tax burden as a result of subsidies for renewable energy is “not significant,” perhaps a fifth of a Euro per kilowatt hour per month on every bill, and of Germany’s total renewable energy burden, less than 20% is due to subsidies for solar, in particular.

Moreover, Shah estimates that if all existing supply of solar panels was sold into all subsidy markets in Europe, the total burden would come to about 7 to 9 billion Euros in 2010, up from perhaps 2.8 billion Euros this year. That’s not that much, he concludes, given rising fuel costs. As for politics in Germany, Shah thinks “the probability of a proposal being passed [regarding subsidy reductions] is very low […] as none of the two largest alliances have dominant power in the Parliament.” And things could well drag on into September, he argues.

But how to trade all that is more complex.

Shah recommends some pair trades, based on which solar manufacturers have exposure to different challenges in different markets. Thing is, for any one stock, you can find issues that don’t affect others, so it’s kind of, pick your flavor.

Suntech Power Holdings (STP), Canadian Solar (CSIQ), and Yingling Green Energy (YGE) are relatively more exposed to a slowdown in Spain than are Evergreen Solar (ESLR), First Solar (FSLR) and Energy Conversion Devices (ENER). But Suntech, Canadian, Yingling and LDK Solar (LDK) are relatively more exposed to high prices in polysilicon, versus Energy Conversion, First Solar and SunPower (SPWR). But The latter, and Akeena Solar (AKNS), are all more exposed to the US market, relatively speaking, and the risk of a cut in the US’s Investment Tax Credit [ITC] than are Canadian, Yingling, and LDK. Finally, Sunpower, First Solar, Suntech, JA Solar Holdings (JASO) and Yingling are of higher quality than Solarfun (SOLF), China Sunergy (CSUN), Canadian, and LDK, with “strong track records and good reputation among the investment community,” in Shah’s view.

Which factors matter most? You decide!

As I mentioned in the Merrill post, all the solar stocks traded down today, in several cases by 10% or more.

Comments

[tessant:]

solar really disappointed me today. have a real bad taste in my mouth.

-scott
solarfeeds

2008 May 29 10:05 PM

[Kevin O:]

What about MEMC (WFR), who makes their own polysilicon?

2008 May 29 10:57 PM

[Leofox:]

I think TAN ETF would be a good buy based on the above recommendation

2008 May 29 11:49 PM

[oguh:]

nobody is talking about the laws of the European commission.
Every compagnie has to reduce there CO2. To do that. Sunpower is the solution. If the compagnies produce to mutch CO2 they have to bye clean air emissions. This cost a lot of money. In Belgium is it so if i place solarpanels my electricwire is going down instat of going up and i get money for it. Think about that.

2008 May 30 05:17 AM

[oguh:]

Belgium, Antwerp may 30,

I just received my newspaper.
The flamisch goverment (5.000.000 people)decided to gave higher premiums for sunpanels for small compagnies. For the period of januari-April 2008 small compagnies invested for 391,5 million Euro in renewed energysystems.
Belgium is one of the smallest countries in Europe.
Please, mister Heller, find anather job.

2008 May 30 06:43 AM

[SHABBAZZ:]

Hello from Belgium. (Leuven)

YGE + JASO are the two winner.

Good quality, a lot of cash, good margins.

I would like to see an article comparing the margins between all this players.

2008 May 30 06:55 AM

[buyforeclos...:]

YGE, LDK, SOLF, JASO... YGE is the best valuie with a .40 PEG and a Forward P/E of just 1.64

2008 May 30 09:08 PM

[Agent Provo...:]

Interesting article, though I haven't heard of Yingling before, are they the ones that make wafers AND beer? ;)

2008 Jun 10 10:57 AM

[akapital:]

Lehman is yelling fire again,the whole solar industries is being manipulated and heavily shorted by by the new york specialist's and they're hedge fund bosses

Some speculate that illegal naked short selling is behind some of the manipulation of solar and alternative energy stocks by traditional brokerage houses and hedges...they're not quite embracing the future...and it's obvious why, they're deep in oil.

Everyone knows Subsidies are not what are currently driving the solar or alternative energy market right now. Certainly this was the case for many years but it is evident now that higher traditional energy is the prime mover. Thus, these observations are anachronistic.

Interest in alt energy is being driven by the prohibitive cost of oil and other traditional energies. In addition, alt energies are cleaner and have less geopolitical impact as well.

But traditional analysts and investors alike are slow to change...even worse, enemies to it...

The U.S. industrial complex is currently sending bodies to Iraq to fight for oil...is it so far fetched to think that it might be fudging markets in favor of big oil? Big oil is use to getting what it wants. In free market capitalism the stakes are high, very high...and when a whole way of life is threatened (big oil) success will not be left to chance. When the stakes are this high, there will be cheaters...

2008 Jul 02 05:59 AM