Solar Sector Plunges Right Along With Market

For most of June, many solar stocks held up well even as the major market indices sold off every week. June 26th was a major breaking point. The S&P 500 broke down by -2.9% and the NASDAQ dropped by -3.3%, and the deepening bearish mood took down the solar stocks en masse. TAN, the Claymore/MAC Global Solar Energy Index, plunged -5.7%, and KWT, the Market Vectors Solar Energy ETF, plunged -4.8%.

Everything has been downhill ever since, even though oil has continued to break records and natural gas continues straight up (the coal fever finally broke in spectacular fashion last week, but expectations are for the run to resume). The solar indices TAN and KWT are now more than 10% below their respective first-day prices - not good for the ETF promotion materials. In a bear market, the cheap get cheaper, and the expensive become a source of profit-taking.

When I wrote "Solar Warnings" on June 11th, I gave a sour short-term outlook on solar stocks. That was only four weeks ago, but we have already been on a wild ride. Solar stocks in general had a strong 3-day run two days after I wrote that piece. They held steady for another week and a half before taking the current plunge. I have no idea how much further these stocks will plunge, but the selling serves as a partial validation of my original thesis. The solar industry is full of execution risk, and there is little reason why we should pay premium valuations for solar stocks. However, the market only cares when it cares; the realization of systemic risk has a nasty habit of making folks suddenly care a lot about risk/reward. Let's take a specific look at the performance of several solar-related stocks since June 11th:
 

 

Even though my start date of June 11th is a bit arbitrary, I still think the above chart is very telling. I defer to the market first before I take note of analyst chatter, company pronouncements, and other various forms of stock promotion. Currently, the market is telling me that there are roughly 3 tiers of solar stocks. Reading from right to left, ESLR, FSLR, and ENER rest comfortably above the rest. STP, WFR, SPWR, ASTI, CSIQ, and LDK occupy a middle tier. The rest fill up the garbage bin. Of course, if you are a value investor who makes a living arguing with the market and betting against it, your interest in this chart starts from left to right. I can sympathize because the recent selling sure smells like panic, and the solar stocks in the garbage bin now sport a mix of forward P/Es below 15 and price-to-sales and price-to-book ratios below 2. If you are a short-seller who makes a living betting against vestiges of the market's folly, perhaps your interest in this chart starts from the right side. Regardless, I am personally a lot more interested in placing bullish bets on these stocks than I was a month ago. I am positioning in individual stocks in the expectations of a (sharp) short-term bounce, and nibbling on TAN for building out a long-term holding.

 

Let's take a closer look at the two "top performers" over the past four weeks, ESLR and FSLR. I just so happened to write about each stock as a follow-up to the June 11th piece because each one seemed to defy my short-term bearish call on the sector.

Evergreen Solar (ESLR)

The excitement over another blockbuster contract announcement has waned and faded again for ESLR. In "Second Try for Evergreen Solar" I switched to fully bullish based on the stock's ability to hold the big pop in the stock upon announcing another $600M in contracts. I also made the case for waiting on a pullback, and I went ahead and nibbled on a few calls on the next day's pullback. ESLR has disappointed ever since and is now struggling to hold onto the June low that marked the bottom of the selling from May's big contract announcement. ESLR perfectly timed the last announcement in conjunction with an analyst day, and the company promptly took advantage of the higher prices to do some fundraising. I am willing to give ESLR another shot here, but a break of Thursday's low will convince me once and for all that ESLR remains a "show me" company and stock. In other words, at that breaking point, I would no longer trust this $1.7B backlog in orders. Also note that earnings are on July 17th. We must ask ourselves what kind of news can they report at this event to top almost $2B in contracts?

First Solar (FSLR) 

First Solar remains a company and stock rife with speculative chatter and analyst commentary, but no new news coming directly from the horse's mouth. On June 24th ("First Solar Earnings Run"), I dove into the bandwagon and made a case for playing a run into earnings at the end of July. It only took 3 more trading days for FSLR to break the 8% stop I marked for those who wanted closer to the typical 1:3 risk/reward trade. On Thursday, in a stroke of blind luck on a holiday-shortened trading day, FSLR missed the 20% stop by a few pennies before soaring twenty points back up (almost 9%). Through all of the churn, FSLR's daily trading volume remains well below the 90-day average, leaving me less willing to attach much meaning to these moves. In the meantime, I buffered my position with puts, but I have now sold all but one. If Thursday's low breaks, the next potential support is at the 200DMA, now sitting at $220. (Stock chart not shown).

We have to believe that the news risk (bad or good) is increasing on FSLR beyond the typical din that buffets solar stocks as a group. For example, so many solar companies have now announced secondaries and dilutive fundraising events in the past 2 or so months that I have to believe that FSLR is considering such a move as well. Granted, FSLR's current cash position is an enviable $680M but that is only 3.4% of the market cap. For a big-cap comparison, Cisco (CSCO) has a cash position 18% of market cap. Intel (INTC) has a cash position of 13% of market cap.

FSLR insiders have been cashing in hand-over-fist. While CEO Michael Ahearn made a lot of news by dumping half of his stock through numerous sales in May, Kenneth Shultz, Executive Vice President of Advanced Development, has sold $9.5M in stock in June on top of all his other sales earlier this year. The company should be cashing in soon as well. Given the stock is now 20% off its all-time highs, FSLR might wait until it can rebuild some confidence in the stock. The next earnings report would present such an opportunity. I am purely speculating here (like everyone else has been doing on FSLR since the last earnings call), but I want to make sure I am thinking through potential catalysts for short-term price moves. Overall, the massive selling by insiders this year continues to represent a major overhang.

So, here we sit with a deeply oversold market looking for a reason to bounce. When that reason appears, I expect the solar stocks to bounce just as fast, if not faster, than they plunged with the market in the past two weeks. I will look to that bounce to reveal further which solar plays the market thinks are the survivors. Beyond the short-term, the solar industry has to work through a lot more execution risk in order to survive the on-going stock market and economic malaise.

Note that while we might think that a global recession will dampen willingness to invest in solar energy, we could see the opposite. A global recession will prompt governments to scramble for pro-growth spending initiatives and investments in solar energy, and other alternatives to oil, will make for tempting targets for increasing government largesse. The companies which prove they have reduced execution risks will be prime beneficiaries.

Be careful out there!

Full disclosure: Long ESLR and TAN. Hedged long FSLR and SPWR.

Comments

[secmaven]

ENER was an absolute dog for years. Along comes a new president who limits the company's future to solar and the price explodes. The first part of this story has created a chart that looks suspiciously like Radio Shack. Will the second part of the story read the same?

[MarcCourtenay]

I like your comments and your courage to speculate on FSLR. The insider selling has me nervous as well, although my exposure is limited to a Bull Spread (buy calls at lower strike price and sell calls at a higher strike price) which is only for the experienced trader/investor.
Anyway, kudos for an interesting and thoughtful article.

[North CoastInvestmentResearch]

Great analysis. A lot of crap floating around this site and the solar stocks; this is a standout excellent piece!

Thanks!

Why doesn't Seeking Alpha provide a way to rate posts? Even Yahoo does that. We need to separate out the garbage more here. Did you see the guy who said charts are voodoo and Yahoo picked it up and put it on their finance homepage. Unreal. Give this some press too by leaving your comments. I know most people don't even want to talk about solar stocks now that they're down for a few weeks.

What do you think about some serious short positions by the new players (INTC, IBM, HPQ, NSM, etc.) looking for some acquisition targets?

[Stockaccumulator]

On SOL (Renesola), solar, and the silly "report" that appeared today on Thestreet.com: In companies like SOL, we here at SA buy "SOL' type opportunities and hold... we plan to hold until summer 09'.

Then we will take a second look, and perhaps continue to hold. (SOL may be owned by another solar company by then, thus making its stock price higher).

We make a lot of money doing this. Others like the "reporter" on Thestreet.com video (not sure who or what he is) apparently hold companies for a few days, weeks or a month or two. Then get scared and sell, even outstanding companies that will have great success. We would do this buy/hold early in the creation of DELL, NOKIA, GOOGLE, and on and on. We have made a lot doing this. There have been many companies like SOL in the past, early on, but they are perhaps 50 in a thousand. IBD helps us find them first, then we look at a hundred other sources, and read the news carefully.

Unlike the little reporter on Thestreet.com, real experts, like Piper Jaffray send people to China, practically audit the company, and report as truthfully and accurately as possible, ethically, and responsibly let the public know what is going on.

Furthermore, Zacks reports on what a multitude of analysts carefully have found out about a company. In SOL they found out it is a great investment.

Investors Business Daily has a computer program that has no reason to lie about a company. It is a computer. IBD simply reports the profit exponential growth and compares it to 25,000 or so other companies in the world. IBD's computer report of course tells us other additional information, accurately about the company. IBD is another great source, in June proving SOL the 4th best company in the world to invest in.

All three, Zacks, IBD, Piper Jaffray, and all the many other analysts have repeatedly reported accurately that SOL is a must own, must buy stock, in their own reporting language.

Thus all of Wallstreet and all the investing

[Dr. Duru]

Hey "North Coast" - a rating system for articles here is a great idea. I will throw my hat in with a recommendation to the editors. Ratings will help authors like me fine tune our work. Thanks for the comments and kudos.

[Stockaccumulator]

Correct about a some in the article, but with some solars, like SOL (Renesola) a bit if a different reason why shares were insider sold... I am reminded when Michael Dell had to sell a lot of shares to help raise capital, as he was limited by various authorities, SEC others involved with Dell's issue, in how many shares he could have newly issued again and again. So he sold off his own personal shares, a lot of them early after the issue, to raise more capital to tool up to meet the unbelievable demand for his product. They called him a thief, dishonest, and on and on. Shortly thereafter the shares ascended in price about 3200 percent over just a few short years. Those that held Dell after that debacle were richly rewarded.

SOL Renesola has proven that it has exponential profit growth, and will continue to ... hence why Investors Business Daily rated it the 4th best company out of 25,000 companies IBD had their computer system totally rate. The Chinese SEC is strict on reissue after reissue, so SOL it appears had to do whatever its dedicated chinese management felt it could to raise money to buy equipment and locations and staff to meet its amazing demand for its low cost recycled (sort of) components that are actually sold to other solar companies. You can't lump SOL in there and their management as some sort of dishonest thieves. In China, people do serious jail time especially where the investors are also Chinese funds, investors, risking their life savings, etc. It is important to read about each reason why insiders sell. Some it is greed, some there is a method to the growth story, like SOL.

Piper Jaffray practically audited SOL, went to China, etc... they love it... per their new article published in June. They do serious investigating, and don't put their name on just any company...

Zacks still today rates SOL number one out of 44 solars rated, and it and its independent analysts that Zacks follows still have a very strong buy on SOL (every analyst!)... with its unique product, SOL is a company to buy, hold and later thank your lucky stars you had the courage to ignore the noise.

We see SOL to over $55 by summer 09', as solar industry will be in explosive demand next year. 08' was just a brief temporary taste of things to come in solar. Imagine when oil is stuck at $150 month after month, seemingly forever. Governments local and national worldwide (especially both Obama and McCain) are on the solar bandwagon, and will be very serious on it next year. Meanwhile governments are figuring how to have more heavy taxes on oil profits, they are simutaneously making Solar a prime tax haven, even more than berore, and citizens worldwide are all for it.

And the chinese are able to adapt to low cost, change, innovation. SOL currently has a PE of 4 to perhaps 6... other solars have a PE, some reaching 300, and some make no profit. SOL today makes huge profit, every quarter, and it is growing exponentially. A case of (temporarily) throwing baby out with the bathwater (SOL)... take the time to read about SOL you will see this is all true...

We make a lot of money on fear here at SA... SOL is a new way, a great way to make money for nothing on other people's fear of nothing. Don't be afraid to hold SOL long... there will be a lot of pundits along the way to ignore...you will be glad you did...

Yours Truly, The Stockaccumulator...

[buystocks]

CSIQ will have P/E of 9 or 8 this year, and probably 5 next year with 550mw modules.

[tech man]

stockaccumalator, i started to sell me shares of sol just the other day, have lost money, badly, but decided to hold. it just kept going down and down. but trying to hang tough. thanks for the lift this morning. i will hang on to this one.if any other report on sol, let me know... t.m. long sol, and siri...

[supershort]

Unlike the little reporter on Thestreet.com, real experts, like Piper Jaffray send people to China, practically audit the company, and report as truthfully and accurately as possible, ethically, and responsibly let the public know what is going on.

Furthermore, Zacks reports on what a multitude of analysts carefully have found out about a company. In SOL they found out it is a great investment.

Investors Business Daily has a computer program that has no reason to lie about a company. It is a computer. IBD simply reports the profit exponential growth and compares it to 25,000 or so other companies in the world. IBD's computer report of course tells us other additional information, accurately about the company. IBD is another great source, in June proving SOL the 4th best company in the world to invest in.


If you follow stock accumulator, that's what you will be a dead dog stock accumulator. Where to begin..........First of all, No company, entity, nor analyst has been given an accurate insight into a China company. China stock is the biggest oxymoron there is. The government controls these companies, they have a pegged currency and don't hesitate not even for a split second to lie, subjugate, opress and with violence if needed to apply their will. You can never ever believe anything that comes out of China, much less a company's fundamentals. But the pegged currency and their propensity to price fix should be enough to drive anyone away. I am a shorter, and believe I would love to short these companies, but they issue lies as much as Obama Hussein changes his platform.

Following IBD is like following ywo week old news. There is nothing new or explosive there. If you use IBD, it's good for a 2-3% gain at best for most stocks. Every once in a blue moon they get a "winner" but so do gamblers. If you are a gambler, then by all means wait for that one payout while the majority will be losers.

Zacks is another dubious "rater" Most of their picks don't work out. Their accuracy is also dismal. So using is worse than using IBD, because they are almost always wrong with their calls.

The fundamentals are this guys and gals. These solar companies had a vision, just like the housing boom in the 70's and subsequent stag-flation (looks familiar doesn't it) that everyone would install these panels at rediculous prices because the economy was burning hot along. That isn't going to materialize, because alas, the suckers that put in these sytems see that the returns and savings are not what's expected. Did anyone look into solar panels for their house? That is the real test. Well I did about a year ago. The jerks wanted over 100K for a system that would still need standard electricity backup. I can afford this even without the subsides. But I evaluated this on it's own merits and came to the conclusion that it just isn't worth it. Well I am not the sharpest tack in the box, but noone has ever taken me for a fool, but this solar is just plain fool's gold.

[Iconoclast421]

The solution to the "3.4% of market cap dilemma" for FSLR is easily found. Simply allow the stock to come down out of the stratosphere. That will bring down the market cap, which will increase the cash percentage. The insiders are selling because they know such a high PE cannot be sustained. FSLR should be trading at $100 within the next few months. That would push their cash % up over 10%. Everybody knows this is the right move for the market. Like the housing bubble and everything else, it may take time for the market to respond in the proper logical way, but more often than not, it gets there eventually. For FSLR, the correction should come at about the same time LDK launches. Indeed, LDK may be the catalyst for the FSLR correction.

[AmesTiedeman]

The good ones will thrive. Look out 10, 20 years. There are winners in this space.

[dedacive]

ldk is not in the top tier? Come on!!

[AmesTiedeman]

A bottom is starting to be put in for the sector.

[AmesTiedeman]

I think we will see a rally to 20.