Hao Jin submits:As the Great Recession of 2008 finally winds down, many Americans face diminished lifestyles. People are only willing to pay for the value they perceive and no more. There will be
continued slow recovery in US consumer spending due to a lack of discretionary cash and increased savings rates.
Asset allocation drives your long-term returns. Successful investing is more about assembling a well-rounded portfolio. Last week when market retreat as investors worried about the Obama's bank plan, the future for Bernanke and China's lending practices, a classic 60% stock and 40% bond allocation might give you opportunity to sell bonds and buy into undervalued sectors.
The solar sector suffered a big selloff recently when the German government proposed a significant cut to the subsidies it pays business and individuals in Germany to use solar panels.
Potential Growth Markets for Solar Companies
Germany is the world's biggest solar market by installed capacity. It accounted for 51% of global solar system installations in 2009. Italy is the distant 2nd. There's more incentive now for solar companies to gain market share from other countries where the market is still small. For example, Germany gets about 2% of all its energy from the sun, but that's huge compared to the United States.
China is another huge market for the future, along with sunnier places like Italy, Spain, Australia, Mexico and the Middle East. Other Asia countries such as Japan and South Korea are also big potentials.
15 Major Solar Players
Followings are 15 solar related stocks with market cap over $100 million. Their average forward P/E is 14.
Name (Symbol) | Forward P/E (1yr) | Market Cap |
Canadian Solar Inc. (CSIQ) | 9.8 | 774.67M |
| 10.6 | 183.53M |
| N/A | 462.93M |
Evergreen Solar, Inc. (ESLR) | N/A | 299.28M |
| 17.5 | 9.57B |
GT Solar International (SOLR) | 10.7 | 875.38M |
| 14.3 | 737.73M |
| 20.4 | 846.19M |
| 15.9 | 2.95B |
| 11.2 | 397.9M |
| 10.9 | 382.96M |
| 11.7 | 2.05B |
| 19.2 | 2.33B |
TRINA SOLAR LTD ADR (TSL) | 11.5 | 1.19B |
YINGLI GRN ENGY ADR (YGE) | 15.2 | 1.87B |
Solar is much more expensive than fossil fuels and even wind. This industry remains uncompetitive versus conventional energy, without governments’ generous subsidies. With reduced subsidies from governments, it will likely squeeze price premiums and has potential to hurt companies with higher-cost structure while lower-cost producers could thrive.
Arizona-based First Solar (
FSLR), the largest solar panel maker in the U.S, made 60-70% of its sales in Germany last year. It has also entered into utility-scale construction, and has been able to build large plants in the 10 to 40 megawatt range quickly. Its PE/G ratio is 0.56 and has very low debt in its balance sheet.
There are quite a few Chinese solar players in this sector, including China Sunergy (
CSUN), JA Solar (
JASO), Trina Solar (
TSL), Solarfun Power (
SOLF), Suntech Power (
STP) and Yingli Green Energy (
YGE).
Comparison between First Solar and Major Chinese Companies
Name (Symbol) | Operating Margin | Debt/Operating CF |
| 37.7% | 0.4 |
| 2.8% | -9.5 |
| 9.7% | -12.4 |
| 3.4% | 4.1 |
12 Alternative Energy ETFs
Fund Name | Ticker |
Claymore/MAC Global Solar Energy | |
First Trust Global Wind Energy | |
First Trust NASDAQ Clean Edge Green | |
iShares S&P Global Clean Energy Index | |
iShares S&P Global Nuclear Energy Index | |
Market Vectors Glb Alternatve Energy ETF | |
Market Vectors Nuclear Energy ETF | |
Market Vectors Solar Energy ETF | |
PowerShares Global Clean Energy | |
PowerShares Global Nuclear Energy | |
PowerShares Global Wind Energy | |
PowerShares WilderHill Clean Energy | |
Net assets for these clean energy related ETFs are small. For example, the biggest one, PowerShares WilderHill Clean Energy (
PBW), only has $721 million.
Conclusion
If you want market-like returns, you must accept market-like volatility. People may abandon a sound long-term strategy in favor of perceived near-term security. Many sell stocks at precisely the worst time, buying high and selling low. Every bear market is followed by a bull; we just don’t know the exact shape, nature and timing of that evolution. But humanity makes progress, science makes new discoveries, human capital grows, and all that gets reflected in future bull markets, according to Ken Fisher, author of How to Smell a Rat.
Solar stocks have been on my watch-list for a long time. Just because you recognize a megatrend, you're not guaranteed to cash in on it if you jump on board at the wrong time. Governments around the world could reduce subsidies to push the solar market to become more efficient and competitive. Even though renewable energy mandates will help drive growth and bring costs down, it might take a while before renewable cost the same as fossil fuel-based power.
With price/sales ratio of 5.5, forward P/E of 18 and profit margin being squeezed, First Solar is still under tremendous downward pressure. It also faces potential deep-pocket new competitors such as General Electric (
GE). But as the economy recovers and the government’s promise to make massive investments in green energy come to fruition, this sector presents a compelling opportunity. If you are a long term investor, it might be a good time to start to accumulate megatrend sector stocks.
Disclosure: I have long position in FSLR.
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