Is it the unprecedented amount of media attention climate change is currently getting? Is it the State of the Union Address? Is it the price of oil? Or is it a combination of factors? In the end, it doesn't really matter; it's this time of year again and the value of the solar sector is heading north.
Yesterday was a great day for solar stocks, while the market as a whole was mainly flat.
I remember this period last year very well. I was long Suntech Power [STP] and Energy Conversion Devices [ENER], acquired respectively for $22.25 on December 21, 2005, and $28 and change on August 23, 2005.
I got out of STP at $35.65 on March 17, 2006 (I've since re-entered and partly re-exited it). As for ENER, I exited it on January 12, 2006, at $50, and never bought it again. In both cases, the stocks were trading at very high multiples, driven mostly by speculation.
The point of this little tale is to highlight the fact that several solar stocks experienced big runs at around this time of year last year, followed by equally big falls as momentum investors moved on. Let's look at a few token solar stocks that were publicly-traded at the time.
Sure, much of the market corrected somewhat during the same period that these stocks did - but for this asset class, the fall from grace was quite pronounced.
Last year should serve as a cautionary tale going into this year: most of the companies in the solar sector are not yet profitable, solar is not yet competitive with conventional electricity generation technologies without government support, and the sector remains very volatile.
If you were able to scoop up some of those solar stocks before they began rising again in the late fall/early winter, it might be a good a idea to take some off the table soon. I purchased part of my current STP position (long) on June 15 at $24.29, as I found the valuation pretty attractive at that level. I got out of the June 15 portion of my position this past Friday at $36, after the company updated its Q4 guidance with weaker-than-expected results for the MSK side of the business (although they revised overall results upwards). Turns out I did that a tad too hastily...but I'm not too concerned - 48% over a 7.5-month period is fine with me.
Suntech Power is a solid long-term story, as are some of its sector peers like Energy Conversion Devices and Sunpower (NASDAQ:SPWR). But beware the volatility! I'm still long STP, but will not hesitate to liquidate all of my position if the price is right (or wrong, depending on how you look at it).
As much as I have faith in STP (and other solar stocks) in the long run, I have no doubt that when the market corrects - and it will eventually correct - this sector's value will deflate appreciably. Look out for good buying opportunities then!
Disclosure: Author long STP.