The Death of Solar Stocks?

I updated my last post on the pension crisis to include a discussion on the Missouri State Employees’ Retirement System (MOSERS), one of the best pension funds in North America. Also, read my response to Bill Tufts' kind message in the comments at the end of the post.

But today I want to switch gears and talk to you about the future, or at least the future I hope we get to see.

Earlier this week, Charlie Rose assembled an excellent panel for a conversation about leadership at Harvard Business School's centennial celebration. The panel included John Doerr, Jeffrey Immelt, James Wolfensohn, Meg Whitman and Anand Mahindra.

This was the best interview I saw in a long time and you need to see it to understand where we are heading. Click here to view the discussion.

The whole panel impressed me. These are all accomplished business leaders in their fields, but the person who impressed me the most was John Doerr, the successful venture capitalist who I already alluded to earlier this year when I wrote Kleiner Bets Big on Green Tech.

At one point, in his opening speech, Mr. Doerr speaking on the financial crisis, says "innovation is racing ahead and accelerating which is hopeful."

Then he said exactly what I believe, "you can bail out the economy but you can't bail out the environment."

As we look ahead, I want you to stop thinking about the daily fluctuations of this erratic market, and start thinking about the key themes that will shape our world.

In my opinion, the big themes that will shape the future of our world are deflation, alternative energy and demographics.

Deflation is already happening in asset prices, commodity prices and housing prices, but it has yet to reach consumer prices (it will once the recession deepens). Demographic trends will reinforce deflation as cash strapped baby boomers start saving up to retire. Demographics also means that biotech and medical device sectors will enjoy a secular bull run.

But the biggest theme in my mind is alternative energy. As John Doerr says, it's insane to "borrow, buy and burn" and if we do not deal with the environment, we are going to have a "carbon crisis that will make the credit crisis look like it was a walk in the park."

In the world of Silicon Valley, Mr. Doerr says the green economy is the great rush. It is a capital intensive world but no matter how weak the economy, we need to power ahead wih these projects.

Even Jeff Immelt, CEO of GE, said that they will continue investing in the big infrastructure projects in alternative energy.

But if you look at the solar sector, you would think that we are about to experience a 100 year eclipse. In fact, solar stocks plunged along with the broader market today on continuing investor fears of a global recession:

GT Solar International Inc. (SOLR) dropped 60 cents, or 11.9 percent, to $4.46 in morning trading, while Evergreen Solar Inc. (ESLR), lost 30 cents, or 11.3 percent, to $2.36. Solarfun Power Holdings Co. Ltd. (SOLF), fell 56 cents, or 10.5 percent, to $4.79.

Other declining solar stocks included: First Solar Inc. (FSLR), down $4.11, or 3.3 percent, to $120.60; JA Solar Holdings Co. Ltd. (JASO), down 47 cents, or 10.7 percent, to $3.94; Canadian Solar Inc. (CSIQ), down 91 cents, or 10 percent, to $8.24; Trina Solar Inc. (TSL), down 87 cents, or 7.8 percent, to $10.35; and Suntech Power Holdings Co. (STP), off 60 cents, or 3.8 percent, to $15.03. [add Yingli Green (YGE) to this list]

Jefferies International Ltd. analyst Michael McNamara said in a client note that the United States' eight-year extension of investment credits for solar energy has provided some optimism for the sector, but the prevailing perception is the U.S. is not likely to be a major growth market until 2010.

We are on the verge of an environmental revolution. Senator Obama has already stated that he will pump over $150 billion into alternative energy to transform the American economy and create a "green" industrial revolution.

I know this is the future. I also know that there is a fire sale on solar stocks right now. The ridiculous selloff that killed solar shares recently has more to do with hedge funds liquidating their portfolios to meet redemptions and Lehman's bankruptcy than the incredible fundamentals of these companies.

As these companies start reporting their earnings, you will see that they are growing at incredible rates. Today, shares of silicon wafer supplier MEMC Electronic Materials Inc. (WFR) surged, a day after the company reported a 21-percent jump in third-quarter profit on higher product volume:

MEMC shares rose 98 cents, or 5.5 percent, to $18.76 on a day in which most stocks in the solar sector were falling along with the broader markets.

The St. Peters, Mo.-based company supplies silicon wafers used in making chips and solar cells.

Piper Jaffray analyst Jesse W. Pichel said MEMC is best positioned in the solar value chain to weather the financial crisis.

I believe that all solars will weather this financial storm because governments will support this sector in the coming decade.

In short, I see a long-term secular bull run in the solar sector. The selloff in the solar sector has been violent and totally irrational, sending this sector into DEEP OVERSOLD EXTREMES.

Many solar shares are dirt cheap - both on a trailing P/E and especially on a forward P/E basis. I still believe this sector that has the most potential going forward, especially from these depressed levels. This is where I am investing the bulk of my long-term money.

Moreover, the future of solar and other alternative energy sources will not be tied to the price of oil. The only "decoupling" theory I ascribe to is that alternative energy will decouple from the gyrations of oil prices. Technological innovation is lowering the competitive prices of solar, wind and geothermal energy sources.

Take the time to read Nick Hodge's article, Solar Stocks Set To Double:

It seems that amid the economic turmoil, traders have lost site of medium- and long-term forecasts, and have completely thrown the fundamentals out the window.

Many solar stocks with bright futures have fallen victim to unwarranted selling and undervaluation as the broader solar market shook out.

But energy demand growth projections still stand. We're still going to need additional amounts of energy, and so the current solar growth projections still stand.

So it's hard to believe that, if the long-term solar forecasts are still positive, that the major stocks should be trading at such low levels.

Here's what I mean.

Under a conservative growth scenario, the solar energy industry will grow 39% by the end of 2009. By 2012, it will grow another 135% from 2007 levels.

I'm talking about the entire global solar industry, which has gone from 877 installed megawatts in 2000 to about 9,797 megawatts (or 9.8 gigawatts!) today. By 2012, over 19,600 megawatts will be installed.

While some of the bulletin board solar stocks and less-liquid solar companies could shake out, the established one are going to be providing the solar ingots, wafers, cells, and modules needed to sustain that kind of rapid solar growth.

That means increased sales, higher bottom lines, and increased valuations for the companies that succeed in the coming alternative energy economy.

Which leads me to another point: Why else would Big Oil be trying to break into the alternative energy industry if there weren't major profits to be had?

All the major oil companies have recently ramped up their alternative energy initiatives, with many of them launching PR campaigns to get their new green word out.

You can bet this isn't a sudden change of heart. It's about generating revenue. And alternative energy is generating revenue.

The industry was worth $33 billion back in 2004, but will climb to $600 billion by 2020.

Big Oil can try to get a piece those profits, but they won't succeed.

It's the established companies, like solar stocks mentioned earlier, that emerge victorious in the alternative energy sector.

You should be learning how this energy boom is going to play out, and invest accordingly.

Finally, The Motley Fool had this to say about the Next Millionaire-Maker Megatrend:

In case you're unaware, an order of magnitude is a multiple of 10.

That's right ... venture capitalist Ray Lane recently told The Wall Street Journal that he has found something he thinks could be 10 times bigger than the Internet.

And he would know. After all, he's a partner at the famed venture capital firm Kleiner Perkins Caufield & Byers. He was also an early backer of Internet companies like Google, Amazon, and Netscape.

And he's not the only one who's taking notice

In a recent shareholder update, Fidelity Magellan manager Harry Lange outlined several reasons why his fund has begun to focus more on cleantech in general and on solar energy in particular.

• Technological advances and greater economies of scale are making it cheaper to produce electricity from solar energy.
• Thanks to a declining cost curve and the rising cost of conventional fuels, solar energy is becoming more competitive in areas with high electricity costs.
• Governments worldwide are providing tax incentives for both producers and consumers of solar energy.

I agree, solar and alternative energy will be the NEXT BIG THING, making the internet look like a blip in technology.

You should do your due diligence and look at the fundamentals of these companies, ignoring the noise that comes from analysts and traders.

Pension funds should also be investing in this sector - after all, no matter how bad things get, the sun will still rise every day.

Have a great weekend!