Solar Investing Without The Politics

by: Dana Blankenhorn

A few years ago, liberal politicians were saying that solar power was about to take off, that it would make lots of money because demand would prove strong. If you listened to those politicians, you lost money.

Today, conservative politicians say that lower subsidies "put the future of the industry in doubt." If you believe these politicians, you will again lose money.

Notice a pattern? Don't take financial advice from politicians. It's like eating at a place called Mom's, or playing poker with a guy named Slim. Instead, look at any claims with a business eye. Understand the fundamentals of the industry.

In the case of solar, we're talking about an industry based on computer chip manufacturing, which means it's subject to steady reductions in cost and increases in efficiency. But you don't start there. You start with low yields, minimal efficiency, and high up-front costs.

So a policy of subsidy made a lot of sense a few years ago, and a policy of reduced subsidy makes sense now, as places like Hawaii and California pass the point of being competitive with grid energy, and remaining subsidies of various kinds -- public and private -- create growing markets elsewhere. That doesn't mean margins will ever fully recover -- demand will remain met by supply for some time.

But recovery is underway.

The sell side of the market remains the sweet spot, because demand will remain short of supply until crossover is achieved more broadly, so companies like Solar City (SCTY) are starting to make sense to analysts at places like Goldman Sachs (NYSE:GS).

Citigroup (NYSE:C) is also turning more bullish on the sector, noting that utility-scale projects should reach crossover, or cost parity, over the next few years. The natural gas glut is hurting solar just as it has damaged coal, but Citigroup has four buys out -- on SunPower (NASDAQ:SPWR), MEMC (WFR), First Solar (NASDAQ:FSLR) and Advanced Energy Industries (NASDAQ:AEIS), while major Chinese players are only given hold ratings.

Meanwhile the major solar ETFs, Guggenheim Solar (NYSEARCA:TAN) and Market Vectors Solar Energy (NYSEARCA:KWT), have made steady progress from their lows of November, with the latter up by almost 50% since November 20. These gains have to be tested against general market conditions, as the last few months have been good for nearly every sector and the market is probably in the process of a short-term rollover.

Until industry leadership is better established, I would prefer to play the ETFs than any particular stock, although if I had to pick one stock that should stay among the leaders it would be FSLR, thanks to its proven ability to adapt to changing market conditions.

But there's good news coming from this sector, and only a politician would argue the point.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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