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TAN: Current Valuation Makes This A Dangerous Play

Apr. 05, 2021 12:22 PM ETInvesco Solar ETF (TAN)CSIQ, FSLR, ICLN, RUN, GCPEF, SEDG, SPWR, XISHY27 Comments
C Jessen profile picture
C Jessen


  • The ETF's nine largest holdings have appreciated an average of 418% YoY despite many struggling with revenue growth or profitability.
  • Valuations measured on P/E and P/S are extreme and require a long-lasting positive development for ETF holdings.
  • Some top ETF holdings have struggled with revenue growth for an entire decade despite massive marketplace expansion taking place.
  • Comparing risk and current valuations are asking investors to take a leap of faith for many years despite limited visibility.
  • I consider establishing a position at current valuation carrying significant risk with underlying holdings being very overvalued.

Investment Thesis

Renewables make for an interesting investment potential as its growth is anchored via a global commitment from our political leaders. I think investors do well for themselves in finding exposure if the valuation allows it. I've looked at Invesco Solar Portfolio ETF (NYSEARCA:TAN) and its holdings in order to determine if the recent pullback allows for an interesting entry point. Within this article, I will consider its top holdings from a fundamental standpoint and consider the current valuation. I find that an entry at this point carries risk of capital destruction as valuations are much too high. Underlying holdings have appreciated greatly over the most recent year with an average of 418% despite some of the companies struggling with either revenue or profitability. Issues with elevating revenue is particularly interesting as the market is expanding massively, but also facing continuous downwards cost pressure and reliance on subsidies. Current valuation requires a very long runway for companies to grow into their valuations while an immature market also entails limited visibility as to how the situation will develop. Basically, current valuation is asking investors to hope for a very positive development for a very long time.


I recently wrote an article covering iShares S&P Global Clean Energy Index ETF (ICLN) which is an ETF with exposure to a wide range of sectors within clean energy such as wind, solar, hydrogen, sub-suppliers and more. I concluded "you will be buying into extreme valuations across the board" with the "risk-reward trade-off much too risky at ICLN's current price". Reaching that conclusion, I went scouting for another opportunity as I genuinely want to obtain exposure to the clean energy transformation. In the previous article I described the clean energy transformation as an unstoppable train and one I would like to board.


This article was written by

C Jessen profile picture
Early 30s 'buy and hold' investor trying to achieve financial freedom to the greatest extent possible. Main focus within dividend growth investing & value. I've been investing for 10+ years and worked across several industries including finance, logistics, oil and pharma. Holding a Graduate Diploma within Accounting and MSc within Business Administration & Supply Chain Management.I cover companies matching my focus as well as portfolio strategy

Analyst’s Disclosure: I/we 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (27)

One very important factor that is imminently hitting this entire sector is quite frankly insane jump in raw material pricing. Silicon going into the panels is up 200% in short term - this will manifest in revenue numbers one way or the other quite soon.
I initiated a speculative position in TAN today at $72 (and in FAN at $21). Thx for the article.
grok42 profile picture
Excellent article, imho. Really like how you lead with the hard data and then draw viewpoints from that data. Makes your conclusions more transparent and I think more likely to be correct.

One factor you introduced was the fact that pricing in solar has had continuous downward trends. This is perhaps partly due to the lack of a strong moat. In a commodity like sector it is probably more prudent to pick individual stocks that have some kind of edge (patents, low cost producer, ability to outrun the competition, etc) than going with an ETF as the intense competition will hinder margins for the majority of the companies in the ETF which do not have an edge. Canadian Solar might be an example of the commodity like nature.

It is kind of astounding how much TAN has dropped and yet is still richly valued.

Personally I have been poking around the grid scale battery companies. Solar is intermittent and has to have grid scale battery storage. We may just see a material jump in demand that outstrips supply going forward and there are disruptive technologies that might break out in that space (vanadium redux flow batteries, zinc air, etc). But have not really found a good pure play in that space that is showing some dominance.

Anyway, great article. grok42
C Jessen profile picture
@grok42 Thanks for taking the time to write a lengthy comment and I highly appreciate the feedback. It's always great to hear the article setup makes sense for the reader.
Fast forward 3 weeks and TAN has had a rude awakening. What are folks collective thoughts on $75 on an entry point?
@DrPeterWilson That's my question
@Simeroth1 i'm patiently waiting for someone much wiser than I to give their $2c, but i did buy into TAN last week around $74
C Jessen profile picture
@DrPeterWilson There are several questions to consider - first of all i'd consider my timehorizon. Do I intend on keeping this position for 10 weeks, 10 months, 10 years. If its the latter, it hopefully (assuming the market goes up over time) doesn't matter much whether you bought 10% +/-. If the plan is to swing trade it, it is of course a whole other situation.

As author i've given my opinion, but there are always a buyer and seller and a whole lot of people and institutions deemed this a good buy at much higher prices (125 All time high).

This article has aged well so far, but if the market had gone up since the date of publishing, I would have been called out just as easily, so I'd take my conclusion as "inspiration" depending on whether you agree or disagree and then conduct your own analysis on top. Some will say I'm right while others will shake their head and consider me a moron, so always, investigate it yourself so you are comfortable holding your position if the equity falls another 30% before it turns around.
Either the world converts to solar, wind, and other alternatives or its goose is cooked. Despite all the talk, atmospheric CO2 concentrations continue to rise every year, with truly dire implications. The fear of that will begin to percolate deeper and deeper into society, and then suddenly crystallize in a kind of panic. Granted, TAN and FAN are out of favor right now, but that could easily turn around and probably will, for the same reasons these ETFs rose sharply last year. Even at current price points, long-term holders of TAN and FAN will probably be rewarded. One could view last year's action as these ETFs' just waking up after years of "neglect."
@Doggywag Thanks for the comments! What would be the next catalysts for TAN to go up from here? Biden's infrastructure plan or something else?
@showwayer There is a secular catalyst that will play out over years: the effects of global warming on things like agriculture, accelerating damage from storms, and human health. Short-term, yes, political initiatives. Another catalyst is buying of TAN by younger investors. ETFs like TAN are extremely popular among ESG-minded investors, and for good reason.
You can sell puts on TAN and get a 20% discount. I did and will own it in the mid 60’s or keep the premium

Selling puts on TAN and TSLA has been a very smart move.
Really great analysis, recently became a follower. Having gotten a double from TAN since March (down from a triple) I found your metrics illuminating on P/E and P/S, reflecting my own concerns that TAN has gotten way ahead of itself. While I fundamentally agree on your rational outlook, I remain uncertain as to what will knock TAN back in our current pro-green, renewables growth environment with full-fledged U.S. government support?

Solar is hardly alone in stretched valuations these days, as Tesla illustrates every day. If investors have bid the stocks in TAN up to this level considering their current metrics, will rationality at some point assert itself? That's the $64M question. Does one remain greedy and look for more capital gains on TAN, or take the money and sit it out for a while?

You should tackle FAN next, the wind ETF. I suspect it is in the same boat as TAN.
I generally agree with the basic conclusion that a lot of the valuations in components of TAN are frothy, with one major exception – the panel manufacturers (particularly CSIQ in the case of this article). However, the logic used to build this conclusion reveals a fundamental lack of insight into the megatrends driving the transformation of the solar industry – a completely new market took shape in 2020 as unsubsidized solar became the cost leader in utility scale energy, which also makes comparisons to pre-2020 market conditions a classic case of apples to oranges.

Here are some examples of that faulty logic:

“While that constant downwards pressure on prices is a source for increasing amounts of new solar installations it is also a pressure on the industry companies as they consistently must squeeze out more efficiencies to ensure positive net income. This pressure may very well show itself in company margins.”

The decline in prices (ASPs) has been reflective of a decline in production costs (per Watt). Margins have been relatively steady for most panel manufacturers at 15-20% gross margin – an admittedly low percentage, but also one that has enabled the market leaders to consolidate their market share, establishing a position that makes it extremely difficult for new entrants to compete with.

“Back in 2017, China's amount of new installations topped at around 53GW which has since dropped due to solar power becoming a less subsidised energy source.”

New installations in China declined between 2017 and 2019 because China met the target of its five-year plan nearly two years in advance. With the current five-year plan, China is ramping up solar capacity massively once again, and building a grid capable of transmitting electricity across multiple time zones with very little loss (using ultra high voltage DC).

“Canadian Solar has been hovering around $2.9-3.4 billion in revenue since 2014 effectively at a standstill despite global installed capacity standing at more than 300%+ since 2014.”

As another commenter also pointed out, Canadian Solar just guided $5.5-6 bn in revenue for 2021.

“There are quite a few risks associated with investing in an immature market such as this and there is one particular risk I would like to highlight here, which is the reliance on subsidies.”

Solar took the throne as the cheapest form of UNSUBISDIZED utility scale electricity in 2020, and in China it is now even cheaper to build new solar capacity than to operate existing coal plants. The tidal wave of change is going to be exponential in the next couple of years, as the economic logic is now firmly established. Spend a few minutes Googling things like Levelized Cost of Energy, Lazard, etc. The data is easy to find and is irrefutable. The only counterarguments are trolls who can’t manage more than saying Nuh-uh and making bad faith claims.
C Jessen profile picture
@MB4302 thanks for commenting. I take it you are long Canadian Solar given your strict focus on it which makes my opinion an unpopular one.

Do remember this is an ETF in which Canadian Solar makes up just above 2%.

If you read my point concerning P/S, you would see that Canadian Solar is the only one within fair valuation from that viewpoint so I find the bashing redundant. However, the rest are far from it.

Thanks for the feedback and happy hunting.
@Chris Jessen the bashing was not directed at you. It was a pre-emptive rebuttal based on past experience in comment threads.

In terms of equity prices of TAN components, it is true that I only have issue with the article’s notions of CSIQ as a stagnant business going forward.

But on a higher level - analysis of the solar market - I find fault in the article’s neglect of market dynamics that fundamentally shifted the paradigm as of 2020, when utility scale solar broke free of dependence on subsidies. All market analysis clinging to the former paradigm of vulnerability to changes in political policy (subsidies) is ignoring the number one reason that solar has a bright future. That’s my main point of critique. The article’s forecast of future market performance is based on past performance in a fundamentally different market.

Furthermore, the notion of an immature market is misguided in terms of polysilicon and panel manufacturers, where there has been significant consolidation of market share among the major players. In that sense, the market looks more like the oil industry than a blurry field of start-ups with the winners yet to be determined.

But I absolutely appreciate your honest efforts and value dialogue much more than yelling and bashing. :-)
...or perhaps your valuation models are being permanently disrupted by a sector leap-frogging the price of energy toward zero.
C Jessen profile picture
@doublejosh could be. My savings are hard earned and I don’t want to throw them away if I can avoid it, there are plenty of other fish in the sea that can secure Alpha. If people want to buy at these levels, and plenty of people do as that is what creates a market, then that is fine, but I’d rather look elsewhere.
I very much agree. The manufacturing transition from the current photo voltaic chips and panels, to ones that that produce higher output - will require deep capital investment for small companies that are marginally profitable currently. Do these companies - leverage up (doubtful), dilute (likely) or get bought out (possible and interesting).

More basic scientific research is coming and I truly believe - solar is on the glide path to being the lowest cost energy source, in my lifetime, but maybe not forever. In the meantime Free-Cash-Flow matters.
Dougmayer profile picture
@Chris Jessen Didn't CSIQ guide revenue 5.5 to 6B for 2021?
explain tesla valuation if you are worried about valuations. The time will come when valuations matter but that time is not now.
C Jessen profile picture
@ababich1 I wouldn’t park my money there either. I envy those who have secured themselves great returns but I wouldn’t sleep well at night. I’ve found great returns elsewhere but investing at ridiculous valuations are like playing at the roulette table. I wish everybody the best of luck doing so.
cyrus.manz profile picture
$TAN ETF components contain some shady stocks.(Pun intended) :-)
@cyrus.manz how about your top 5
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