When Will the Sun Rise for Solars?
By Paul Goodwin
Emerging Markets Specialist, Analyst and Editor of Cabot China & Emerging Markets Report
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June 16, 2011 - When Will the Sun Rise for Solars?
A Great Stock Story is Still Just a Story
A Thriving Solar Stock that's Farther Down the Food Chain
I'm fascinated by solar power on any number of levels, only one of which has anything to do with investing.
First and foremost, the science geek part of me just loves the idea that you can put a chip of silicon out in the sun and get electricity out of it. And you can keep getting that electricity as long as the sun shines.
When I was growing up in the 1950s, the good people at Bell Labs (anyone else remember Our Mister Sun?) were the science equivalent of Walt Disney: benevolent, competent and full of surprises. (Work at Bell Labs gave us, for example, the laser, the transistor and the UNIX operating system and produced seven Nobel Prizes. But I digress.) The photoelectric effect had been a known phenomenon since 1839, but it wasn't until 1954 that Bell scientists announced their development of a genuinely efficient solar cell. And it was a sensation.
Stories about how a piece of silicon doped with the proper chemicals became a source of "light electricity" were everywhere. And it didn't matter that it cost $250 to get one watt of solar power. At the time, the world was full of oil and coal, and electricity from the sun was just a curiosity.
In fact, if it hadn't been for the Cold War-fueled space race and someone's suggestion that using solar cells to replace a battery might extend the useful life of the Vanguard I satellite, the entire photovoltaic industry might have been swept into the dustbin of history.
After the '50s, far-sighted scientists, the U.S. space program and a few remote-power products like marine buoys kept the research alive. By the early 1970s, solar panels were being produced at a cost of $10 per watt.
Then came the late '70s and the first Oil Crisis, which kicked oil prices well and truly out of their artificially low levels, and people started to get serious about solar. Solar cells moved out of portable calculators into all kinds of applications like battery chargers for isolated battery-run equipment.
And over the years, dramatic accidents like Chernobyl (1986) and Fukushima (still going on) have taken the shine off of nuclear power.
Several European countries, Germany, Italy and Spain chief among them, introduced legislation in the 1990s that mandated "feed-in tariffs," which required electric utilities to buy power from solar arrays at a premium price, while other renewable sources received slightly lower rates. These tariffs (which were actually first instituted in the U.S. in 1978 during the energy crisis) were clearly designed to encourage solar, and they worked well.
Chinese solar companies popped up like mushrooms in the rain as China's industrialization picked up speed, encouraged by both government support and a scarcity of silicon, and it looked like solar was off to the races.
Then 2008 flattened the world.
The 2008 global economic crisis and near economic collapse in the West caused huge declines in government revenues. The retrenchment necessary to reduce deficits often undercut feed-in tariff programs, shrinking demand for new solar arrays.
These days, the efficiency of the best solar cells is approaching the 29% theoretical maximum and the production cost for photovoltaic cells to generate one watt is under a buck. Oil prices have spent some serious time over $100 per barrel, and Chinese factories have tons of excess production capacity, which is likely to keep price competition keen for quite a while. Moreover, Germany has recently announced its intention to completely phase out its nuclear power program.
And finally, Google just announced this week that it's sinking $280 million into a collaboration with California solar developer SolarCity to finance the installation of home solar panel systems.
It should be the best of times for the solar power industry, and thus for solar stocks. But it isn't.
First Solar (FSLR) is a leading low-cost U.S. manufacturer, but its stock spent all of 2009 and 2010 hacking around in a trading range with support at 100 and resistance from 150 to 170. Trina Solar (TSL), a big Chinese manufacturer with a vertically integrated ingot-to-array strategy, hasn't given back much of its 2009 gains, but since the beginning of 2010, its main trend has also been sideways.
So why am I writing about solar if solar stocks are going nowhere?
The main reason is to remind you that a great stock story (and there aren't many stories with more compelling long-term prospects than solar power) is still just a story. Even a story with good revenue and earnings trends can't force a stock to rise in price.
I still love the solar power story, and in the past I have recommended several photovoltaic manufacturers [including Trina Solar and LDK Solar (LDK)] in the Cabot China & Emerging Markets Report. Every week I check in on the four or five solar companies that I regard as the cream of the Chinese crop. I even get tempted when a reputable solar manufacturer like TSL trades at a P/E ratio of 4.
But I also know from painful personal experience that the price of trying to buck a market trend can be very high indeed. (I wrote about--but didn't recommend--China New Borun (BORN), which has a great story and good earnings numbers, in an earlier Cabot Wealth Advisory.) You might want to take a look at the chart for BORN to see what can happen when a market in a committed downtrend gets hold of an interesting speculative stock.
The odds on growth stocks are always risky, which is why growth investors rely on one or two winners a year to provide their gains. It's also why the discipline of cutting losses short--which is especially difficult when your investment results from a really attractive story--is so critical to success as a growth investor.
I'll keep monitoring solar stocks, and when their charts turn as attractive as their stories and their numbers, I'll be all over them. And I'll tell you so.
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My stock pick today is GT Solar (SOLR), a New Hampshire-based company that actually has a supportive chart to go along with its good story and supportive fundamentals. Despite the name, it's only partly a solar story, which may be helping it along.
GT Solar sits back a step from the volatile world of retail and wholesale sales of completed solar cells, panels and arrays. It does this by supplying the specialized equipment that's used to produce photovoltaic cells and arrays. Whether a solar company is in China, the U.S. or anywhere else, there's a good chance that the equipment it uses to grow its polysilicon and multicrystalline ingots came from GT.
The company doesn't have all its eggs in the solar basket, however, as the company's product line also includes furnaces that produce industrial sapphire, which feeds the surging LED lighting industry.
Annual results have been growing rapidly, with revenue up 65% in 2011, and earnings more than doubling from 60 cents per share to $1.24 a share. Q1 results revealed a 78% rise in earnings on a 40% gain in revenue. And the company just reiterated its fiscal year guidance and raised its orders backlog for the year.
The trailing P/E ratio on SOLR is just 10 and with a forward P/E of 8, there's not much bloat in the stock. SOLR's price is just appreciating into the low teens, where it will become more attractive to large institutional investors. This is a stock that has rallied from 5 in May 2010 to as high as 14 earlier this month.
It's also worth noting that the videos on GT Solar's website all feature Chinese characters and the company's Asian offices include a headquarters in Hong Kong, with mainland branch offices in Shanghai, Beijing and another in Hsinchu, Taiwan.
There's not a lot of wisdom in either trying to anticipate a market bottom or buying while the broad market is in a downtrend. But GT Solar belongs near the top of your watch list for action when the clouds clear and buyers retake control of the market.
Editor of Cabot China & Emerging Markets Report
P.S. Click here to learn more about GT Solar and other top stocks recommended by Cabot China & Emerging Markets, which was the #1 ranked newsletter for five-year performance in 2009 and 2010 with a total return of 174%. Don't miss another five years of monster growth! Get started today.