Has the Solar Sector Bottomed?

A few days ago I wrote about alternative energy, focusing my attention on the solar sector. This morning, the sun is shining, I am enjoying a nice cup of coffee and I wanted to look into solar stocks once again, examining the latest pullback in the sector.

I read an excellent article by Peter Lynch, not the legendary investor, but someone who has worked for 31 years as a Wall Street security analyst, an independent security analyst and private investor in small emerging technology companies. He has been actively involved in following developments in the renewable energy sector since 1977 and is regarded as an expert in this field. He was the contributing editor for 17 years to the Photovoltaic Insider Report, the leading publication in PV that was directed at industrial subscribers, such as major energy companies, utilities and governments around the world. Mr. Lynch also wrote this primer on photovoltaics for InvestorIdeas. (He is currently a private investor and has from time to time been a financial/technology consultant to a number of companies. He can be reached via e-mail at: SOLARJPL@aol.com.)

In an article from InvestorIdeas, Solar Stocks - Looking for A Bottom, Mr. Lynch examines the recent shakeout in the solar sector and asks whether or not it is a good time to be buying.

I quote the following:

Amongst this general malaise our little universe of solar stocks has moved even further to the downside, by an average of 43% since January 2008 versus the Dow, S&P and Nasdaq moving down an average of approximately 15%. This should be no surprise, since younger companies, in emerging industries generally have a much higher BETAs (higher volatility) than the normal more mature stock.

Mr. Lynch then adds:

As a result of this, I guess you would say that the bad news is that solar stocks have fallen 3 times more than the averages and the good news is that hopefully they are close to a bottom. One thing for sure, is that when they do turn up they will move just as fast to the upside as they have to the downside. So far to date, their higher volatility has worked BOTH ways.

He then looks at technical indicators like the 50-day and 200-day moving averages to gauge whether or not the sector is bottoming:

As you can see (click on image above to enlarge it), EVERY SINGLE solar stock (prices as of the close 7-28-08) we follow is BELOW its 50 day moving average. This certainly tells us that the entire solar sector is in a downtrend. The 200 day moving average (also shown below) is a longer term indicator that would NOT be utilized as a short term trading tool but is more an indicator of how deep a stock has fallen. When the sector does turn up, the stronger stocks will generally turn around and advance first ABOVE their 50 day moving averages – that will be a sign of the turn and traders can make the appropriate moves at that time.

Mr. Lynch ends his discussion by focusing on three things that are important to understand regarding investing in the current renewable energy industry:

• Just the Beginning - This is “just the beginning” of the birth of the renewable energy industry. The renewable energy industry is at the same stage now as the automobile industry was in 1900. We are seeing the first few companies becoming public and we will see hundreds more over the next decades. It will be an exciting time for investors and there will be plenty of opportunity for investors to make money and also help the environment, which is a welcome change from the fossil fuel dominated energy sector of today.

• Highly Volatility - At this early stage of development there will be plenty of volatility in this sector until it becomes a more mature industry. Investors must carefully select their entry points and be patient. This sector is NOT for the faint of heart. An investor has to be careful to only invest a portion of their portfolio, which they have designated for “higher risk” investments. These will be the stocks that you can make the most money on, but also the ones you could lose the most on. Risk and reward have always been intrinsically linked and this is no exception.

• Pending Legislation – I expect that we will see some pending solar legislation pass in the congress before year end, perhaps sooner. Once this occurs I think it will light a fire under solar stocks and they will make a strong run up before year end. Next year there will be problems in the industry – excess silicon supply, margin compression and PE contraction. But in the shorter term, I see solar stocks making another run up as just another step in their eventual movement to a booming industry of the future.

Finally, a money manager sent me a very recent FT article, Science Briefing: Solar power goes all night, which discusses a major technological breakthrough in solar energy that was just developed at MIT.

I quote the following:

In what scientists are calling a “giant leap” toward clean energy, researchers at MIT have developed a way to store solar energy for use when the sun does not shine, paving the way to large-scale solar power.

Sunlight has the greatest potential of any power source to solve the world’s energy problems.

In one hour, enough sunlight strikes the Earth to provide the entire planet’s energy needs for one year.

Until now, however, solar power has been a daytime-only energy source, because storing extra solar energy for later use is both expensive and inefficient.

Inspired by photosynthesis, the researchers created a process that enables the sun’s energy to be used to divide water into hydrogen and oxygen gases. Later, the oxygen and hydrogen may be recombined inside a fuel cell, creating carbon-free electricity to power a house or an electric car, day or night.

The key component in the process – detailed in the latest issue of the journal Science – is a new catalyst that produces oxygen gas from water. Another catalyst produces hydrogen.

The system consists of cobalt metal, phosphate and an electrode that are placed in water.

When electricity, whether from photovoltaic cell, wind turbine or other sources, runs through the electrode, the cobalt and phosphate form a thin film on the electrode and oxygen gas is produced.

Combined with another catalyst, such as platinum, that can produce hydrogen gas from water, the system can copy the water-splitting reaction that occurs during photosynthesis.

James Barber, a leader in the study of artificial photosynthesis not involved in the study, called the discovery a “giant leap” toward generating clean, carbon-free energy.

These are exciting and dangerous times we live in. On the one hand we see a global ecological calamity unfolding before our eyes and on the other, we see a technological revolution in renewable energy that will significantly improve our standard of living. I just hope it won't be too late before governments wake up and start implementing massive large scale renewable energy projects.

One thing is for sure, pension funds should be strategically allocating to the renewable energy sector, investing in both public and private markets. The long-term potential of this sector is just too tremendous to ignore.

Note: I added a blog, Solar Feeds - All Solar News, to my blog list (scroll down right hand side to view my blog list). You will read about solar technology and all sorts of cool things that are coming to the market, including solar powered cases for the new iphones3G.

Update (03-08-08): Watch Louie Navellier's video commentary on the solar sector by clicking here (a little outdated since the moratorium on solar projects was lifted by the U.S. government). The mainstream media is also picking up on MIT's breakthrough discovery on solar power; ABC News posted this article yesterday. As far as blogs, I read this interesting article on solar stocks from Seeking Alpha, tying the prospects of solar stocks to current the credit crisis and how operating cash flow will affect the growth of these companies. In my opinion, however, these companies are growing so fast that they will be able to secure financing from public and/or private investors should they need to.

Update (08-08-08): Solar shares continue to get hammered despite blowout earnings reports (look at Yingli Green's latest numbers). Some of this has to do with the drop in oil prices but some of it is pure hedge fund manipulation driving shares lower so they can scoop them up at better prices. As prices fall, the valuations become that much more compelling. My favorites in this sector remain SOLF, ESLR, YGE, TSL, LDK, CSIQ and WFR.