Many of the solar stocks are now quite decently priced, and they are showing strength. The S&P500 recently returned to its low of 1250. Yet stocks such as LDK Solar (NYSE:LDK), ReneSola (NYSE:SOL), and Solarfun Power (SOLF) are significantly above their year lows. This is a good sign for the industry.
Still, these stocks are significantly off their more recent highs, so they look like bargains again. The reasons for their fall are many:
- They have fallen with the falling equities markets
- They fell earlier to consolidate after a huge earnings season run up (virtually all had great earnings)
- A recent article pointed out that many may face cash flow problems in the near future
- The possibility has been recently raised that Spain might not continue its subsidies for solar power (or may cut them substantially)
- The same possibility was raised about German subsidies a little earlier, and
- There was a recent big decline in the price of oil.
All of these reasons seem to make them good buys now (or at least better buys). They all seem to have attractive valuations. The average earnings predictions (from TD Ameritrade) for the stocks are:
click to enlarge images
The price, 1 year target prices, PE, FPE, and PEG ratios are similarly revealing:
Most of the PE, FPE, and PEG data are from Yahoo Finance.
It is easy to see why these stocks are attractive. LDK and SOL are pricier now, but they have better growth potential. SOLF is cheaper now, but it has a little lower growth potential for the longer term. All would seem to be great buys. There certainly are a lot of reasons why they have been beaten down recently. Currently we may be at or near a near term bottom for solar.
I think there are many reasons for an upturn going forward. One glaring example is that one of the two top topics at the G8 conference this week is energy. Another example is T. Boone Pickens recent insistence that the U.S. needs to immediately and completely become energy independent. Specifically he is calling attention to the huge trade deficit due to oil importation. I think he cited $700 billion dollars this year.
My most recent ball park estimate was a more modest $500 billion, but you can see the obvious importance of this figure. Senators McCain and Obama have also been making energy a key issue in their campaigns recently. All this bodes well for alternate energies such as solar power. It makes one believe that such things as solar paneled cars (which are actually starting to be made) may become staples in the U.S. in the near future. It makes one think that the U.S. government is more likely to strengthen its support for the more widespread adoption of solar power. This would be a tremendous boon to the solar industry.
Several articles came out after the articles about the Germany and Spain subsidy cut speculations. These later articles indicated that there may not be any cuts. These countries are running into the same energy crisis vis-à-vis oil that the U.S. is. In light of the current oil prices, it doesn’t seem that either of these countries can afford to lessen their support for solar energy. Rather, it looks like the U.S. is more likely to strengthen its support, which would be a big boon to the solar industry.
The earnings season for solar stocks is about to begin again. LDK and First Solar (NASDAQ:FSLR) are slated to release their earnings July 28, 2008. SOL and SOLF will likely follow within a month. These earnings are likely going to be great. There is no reason to believe otherwise. The same fundamentals that were in place last earnings season are still very much applicable this earnings season. Further companies such as LDK will not have had the bad weather conditions in the spring that disrupted production in the winter (Q1). I think they should all beat again, possibly by considerable margins.
Some people are speculating that oil might return to $100. However, this seems unrealistic to me. The geopolitical ramifications of rebel activity in Nigeria and the nuclear enrichment activities in Iran don’t look like they will end soon. There is still continued growing demand from both China and India, which doesn’t look like it will abate. Further we are in hurricane season, and this year is predicted to bring a higher than average number of hurricanes. Summer is also the driving season.
My impression is that knowledgeable economists believe that oil will trade in the $130-$140 range for most of the summer. It seems likely it will hit $150/barrel or more sometime during the summer or early fall. There is some speculation that demand may slow in the fall as people in the U.S. and elsewhere begin to really realize how much their gasoline is actually costing them (and cut back on usage). However, if this begins at that time to cut into your solar stock prices, you could always sell your solar stock. If you buy now, you will likely have made profits by then.
Some people have suggested that the solar companies all have cash flow problems. As with most startup types of businesses, they do. However, I believe the companies I have listed should survive these problems well. LDK is in a particularly good position. It has firm contracts for virtually all of its production for 2008 and 2009. Further if it gets its polysilicone plant done anywhere near its currently predicted schedule, it will do extremely well. The polysilicone plant should allow LDK to essentially double its margins. All LDK has to do is execute on its plan. LDK has so far shown that it is capable of doing just that. The current earnings estimates for LDK do not fully reflect it getting its plant done on time.
However, LDK looks like it is close to its schedule, if a little bit behind. SOL is in many ways similar to LDK, although it has no polysilicone plant in the works yet. The analysts love it as they give it a current average rating of 1.8. SOLF is probably not as well off in this respect, but it expanded its margins significantly in its most recent quarter. The conditions which allowed for that seem to be firmly in place for this next earnings season also. It should do well, at least through the end of this year.
Some people have suggested we have not hit a near term bottom in the market, especially since there has been no huge VIX spike (as marked the lows in January and March). However, others, such as Dr. Duru, have pointed out that lows are not always marked by a VIX spike. He mentioned instead a deep low in the T2108 may have in fact marked the market bottom this time. The S&P500 does seem to be bouncing off the 1250 support line. The bell weather fertilizer stocks seem to be rising in the face of falling grain prices. I think the chances that we have seen a near term bottom are good, especially since we got a good retracement in the price of oil (-$10/barrel) in the first couple of days of this week.
If the market is now heading up, solar stocks should do well. If the market is only staying steady, solar stocks should do well with a great earnings season on the horizon. If the markets are still going down, even the best stocks may get hit.
I am not completely sure where the markets are going in the long term. We have apparently entered a bear market. However, for the short term, solar stocks look like they should do well with a great earnings season coming up. These three should all be buys. Further, SOLF (17 million shares) and LDK (15 million shares) both have significant short positions. If these start to unwind as their prices go up, the prices of these stocks will zoom even farther upward. SOLF with almost 40% of its float shorted looks to be the best short squeeze candidate.
Disclosure: Author holds a long position in SOLF and LDK