advertisement
Looking for bargains in this wild and crazy stock market? May I suggest solar power stocks?
They've been beaten up badly along with the rest of the energy sector. But with new government subsidies likely to kick in sooner than expected and an end to the silicon-wafer shortage, these stocks could show gains of 20% or more in 2009 -- even with a global economic slowdown in the cards for the first half of the year.
I'm pretty sure this potential return isn't enough to entice you off the sidelines. Afraid to buy anything in this market? Who can blame you? Single-day drops of 778 points in the Dow Jones Industrial Average ($INDU) can raise a worry or two. And it's not like the carnage of Sept. 29 was an aberration. We're still in a bear market, as far as I can tell.
So let me make the case for buying stocks in this sector at some point and then lay out the pros and cons of buying now versus waiting for the all-clear. Even if you're not interested in this sector, the exercise should help you make a decision on whatever other bargains have caught your interest recently.
Sunburn
Let's start with the pain.From Aug. 29 through Sept. 30, First Solar (FSLR, news, msgs) was down 34%, Evergreen Solar (ESLR, news, msgs) was down 43%, Suntech Power (STP, news, msgs) was down 26%, and SunPower (SPWR, news, msgs) was down 38%.
That horrible month fits well with a horrible year. In 2008's first nine months, First Solar was down 53%, Evergreen 69%, Suntech 57% and SunPower 53%. The day-to-day volatility has been stunning. On Sept. 29, when the Dow had that 778-point drop, First Solar dropped $26.82 a share, and SunPower fell $22.41, for example.
Why so much damage? Let me count the ways:
- During the panicky sell-offs of a bear market, investors pull money first out of the most volatile mutual funds, exchange-traded funds, hedge funds and stocks. These high-beta investments (beta is a measure of volatility) are among the first to show the kind of huge price swings that scare investors most. Investors sell high-beta holdings indiscriminately when fear runs high. And solar stocks have a high beta. Evergreen Solar, for example, has a beta of 2.17, meaning that it's more than twice as volatile as the market as a whole.
- The solar sector has tracked the plunge in oil, natural gas and coal stocks in the second half of 2008. Investors generally see high oil and natural-gas prices as supportive to the development of alternative energies. Falling prices for fossil fuels, on the other hand, lead investors to believe that fewer utilities, factories and homeowners will invest in alternatives such as solar. Oil prices fell 28% in the year's third quarter. Energy stocks in the Standard & Poor's 500 Index ($INX) lost 25% for the quarter.
More from MSN Money
- Fallout from the financial crisis has hit solar stocks hard. Because solar companies are still raising capital to expand production, investors have sold their shares on fears that either they won't be able to raise capital or their capital cost will climb.
- The surge in the U.S. dollar against the euro during the financial crisis has also hurt solar stocks. As of Oct. 1, the euro was down 10.3% against the average price for the U.S. dollar during the second quarter. That's a big deal for most solar companies, because about 70% of the industry's sales are denominated in dollars while many company's costs are denominated in U.S. dollars or Chinese yuan. So a falling euro and a rising dollar mean companies get less in dollar terms for the stuff they sell and pay more in euro terms for the stuff they have to buy. Investment bank Collins Stewart estimates that currency moves will cost solar companies about 6% in quarter-to-quarter revenue growth.
- Not that profit margins need any more pressure. Prices for solar cells and modules have been falling. Investors worried that demand might start to slow have fled out of the fear that without big increases in sales, falling selling prices will mark an end to high earnings growth rates.
- And finally, questions about the level of government support have made investors unwilling to commit to buying shares. Until recently, investors didn't know whether cuts in Spain's generous subsidy program would be devastating or relatively minor. And the U.S. Congress still has not extended solar tax credits that are set to expire in October.
Video on MSN Money
The financial crisis is globalIn the past week we've seen bank runs in India and Hong Kong, trading halts in Brazil and Russia, and bailouts in Belgium, Germany and the United Kingdom. Jim Jubak wants to know if anybody has a global fix.
Sunrise
So why invest?Because many of those worries look to be overblown:
- The global subsidy picture doesn't look nearly as grim as investors had feared. The cuts have turned out to be less than expected, with a cap on 2009 installations of 500 megawatts. Still, it's a big reduction from the 1,000 megawatts likely to be installed in 2008. The drop in demand from Spain looks likely to be met by a surge in demand from Italy -- thanks to new subsidies -- where solar installation is expected to hit 400 to 500 megawatts in 2009, up from 100 to 150 megawatts in 2008. In the U.S., Congress added an eight-year extension of tax breaks for solar technologies and a one-year extension of tax breaks for wind power to the $700 billion financial-system-rescue bill to ensure more Democratic votes. The Senate and the House had both passed solar tax credit bills in the closing days of September, but the bills were significantly different, and the consensus opinion was that it would not be possible to reconcile the competing versions in this session of Congress. Adding the subsidies to the bailout would end worries that the industry could stall while it waited for a new Congress to act in January. In addition, in mid-September, energy regulators in California upped the requirement that utilities in the state generate 20% of their power from renewables in 2010 to 33% by 2020.
Rate this Article
High