The only thing hotter than the sun in 2013 have been the prices of solar stocks. Since the first of the year the MAC Global Solar Energy Index is up over a whopping 80%. By comparison, in this same period of time the S&P 500 Index has returned a respectable 13.8%.
So what's going on in the solar industry to drive these high returns?
If you have been following the solar industry at all for the past few years, you know that Chinese manufacturers have been dumping photovoltaic panels on the market at prices below their cost of production thanks to government subsidies. This trend has recently started to reverse and the Chinese solar industry is likely to experience consolidation. The result has been a slight decrease in overall production for the industry as a whole.
In China and Japan there have been record levels of demand for solar energy. The U.S. solar market continues to grow, the European economy has stabilized, and other international markets have seen increased growth in demand as well.
The combination of an increase in demand and decrease in supply has lead to more sales and improved margins for solar companies. As we can see from the recent performance of solar stocks, investors have taken note of the improving environment for the industry.
Two High Flying Solar Stocks & A Popular ETF
SunPower (NASDAQ: SPWR)
Founded by industry legend David Swanson (you have to be a legend if you have a law named after you), SunPower stock has returned an amazing 309% year to date. SunPower achieved profitability in the second quarter of this year for the first time since 2010. Like many other manufacturers, the company is running its factories at full capacity and looking for ways to increase output.
SolarCity (NASDAQ: SCTY)
In addition to Paypal, Tesla, and SpaceX, Elon Musk is also the co-founder of a solar energy provider (what can't this guy do?). Solar City had it's initial public offering (NYSEARCA:IPO) in December of last year and the stock is up 187% since the beginning of the year. While its astronomical returns are very enticing, the company is still very young and far from profitability.
Guggenheim Solar ETF (NYSEArca: TAN)
The Guggenheim Solar ETF seeks to replicate the performance of the MAC Global Solar Energy Index, before fund fees and expenses. With only 29 companies in the fund and close to 60% of assets invested in the top ten holdings, it is a highly concentrated ETF. This concentration has lead to remarkable returns since the beginning of the year of 82%. ETFs are a great way to get broad exposure to an industry while avoiding idiosyncratic risk.
There is no denying that the long term trends are extremely favorable in the solar industry. The finite amount of oil and gas in the world, the increasing use and support of renewable energy by governments and people alike, and improving technology are just a few of these trends. The industry is still young and solar stocks are still susceptible to large swings in prices but be on the lookout for this industry to continue to grow in the years to come.
More Solar Stocks?
*Returns sourced from Morningstar and as of 08-23-13
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.