Grey Skies Cloud Solar Industry’s Future

The world is about to change forever.

The International Energy Agency predicts China will surpass the United States as the world’s largest energy consumer shortly after 2010.

U.S. consumers are already starting to see the impact. In the midst of an anemic recovery, oil is above $80 a barrel, the national average gasoline price is $2.57 a gallon, and natural gas prices are still more than double what they were for decades.

There will be corrections, but energy prices are going higher and contrarian investors should be spotting a sizeable opportunity in the most beaten up, out of favor energy sector in the world.

Grey Skies Cloud Solar Industry’s Future

The world has returned its focus to developing all sorts of new energy technologies. Nuclear is back on the table. Geothermal projects are under construction all around the world. Wind-based power ventures are getting the financing they lost back during the credit crunch. But the real opportunity when it comes to alternative energy is shaping up to solar.

Now, long-time readers know your editor has been a solar bear for years. The upfront cash outlays are large. The payback periods (the time it takes for the initial investment to be fully recouped) are as long as 20 years.

Basically, the economics of solar are terrible.

Of course, we realize questionable economics aren’t going to stop a politically-favored industry from prospering. But any industry that relies on funding from cash-strapped governments just isn’t something your editor would be willing to seriously consider investing in.

That, however, is starting to change.

When the Going Gets Tough…

The last few weeks have not been good for “buy and hopers” of solar stocks. Probably the worst-performing of them all has been Energy Conversion Devices (NASDAQ:ENER).

A few weeks ago the 50 year-old Michigan-based solar panel manufacturer released its latest earnings and the results were not good.

Analysts were expecting a 43 cent per share loss in the second quarter. The company posted a loss of 92 cents per share.

More importantly, the company said it was running at about 50% of capacity in the second quarter and would be cutting capacity utilization to 25% in the third quarter.

The only thing that has fallen faster than demand for solar panels is demand for solar stocks.

The earnings-induced sell off pushed ENER shares down to a 6-year low. The decline capped off a decline from a 2007 high of more than $80 a share to less than $8 today – a decline of more than 90%.

On top of that, almost none of Wall Street’s perpetually optimistic analysts are willing to stand behind ENER during these tough times. Since last August analysts at JP Morgan, Citigroup, and Piper Jaffray have all downgraded the shares. The ratings even include the extremely rare “sell” ratings.

No one wants solar right now and that’s why, for the first time in years, we’re getting interested in solar.

Everything that Could Go Wrong has Gone Wrong

Just look at what the solar industry has gone through over the past few months.

Germany, a country with a government that has proudly subsidized the solar industry for years, recently announced subsidies could be getting cut. Draft legislation was recently introduced to cut subsidies for rooftop panels and solar farms by 15%.

In an industry dependent on subsidies, any cut is going to have a noticeable impact.

Also, the entire industry is facing tough times. The prices solar manufacturers have fallen sharply across the industry. In ENER’s case, UBS noted the average price per solar module fell by 10% to $2.10 per watt. And that’s still 10% higher than the rest of the industry.

As the last earnings season has shown, practically any company that doesn’t have a big presence in the Chinese market, where the command-and-control economy has commanded solar to be a winner, has been getting hammered.

Finally, in the United States, funds from the stimulus package earmarked for solar projects have been tied up in red tape and the federal bureaucracy. Also, with 49 of the 50 states facing budget deficits, there isn’t much extra cash to hand over to solar companies. And when it comes to installing a cap-and-trade scheme, a system designed to take money from the energy consumers and give it to alternative energy companies, prospects for implementing it are continually getting pushed back.

Avoid the High Costs of Conforming

Everything that can go wrong for solar has gone wrong. And, if judging by the price declines of the top solar stocks is any indication, solar investors have sold out and moved on.

That’s all why solar is actually looking more attractive than ever. Not because the industry’s prospects for are great, but because they’re so poor.

Remember, buying something that no one wants is the toughest move an investor will ever have to make. Yet, as contrarian investors know, when a stock is so hated that no one is willing to buy it, the risk is lowest and the potential reward is the greatest. Not all of them will work out, but with the highly attractive risk/reward dynamics, less than have of them have to work out to become a very successful investor.

John Maynard Keynes wrote:

Knowing that our individual judgment is worthless, we endeavor to fall back on the judgment of the rest of the world which is perhaps better informed. That is, we endeavor to conform with the behavior of the majority or the average.

Right now, we’ve found a stock that’s absolutely despised. We’re seeing a situation where nearly everything that could go wrong has gone wrong, share prices have declined significantly, and almost no one is willing to buy now.

For contrarians who see that most everyone is conforming to the crowd and getting out of solar, it could be the right time to buy.

China is on the verge of becoming the world’s largest energy consumer, energy prices are going higher over the long run, and solar could be in for another strong run. If so, solar would be the energy comeback story that no one is paying attention to right now. And disciplined investors with the right timeline should be starting to look at how to take full advantage.

By Andrew Mickey

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