Solar stocks have been up and down in 2013, but thus far the ups have been more substantial by far. As measured by the Guggenheim Solar ETF (TAN), the sector is up about 65% year-to-date.
But the solar sector has not been without volatility. The TAN solar ETF lost about 10% in three weeks to start June, and top stocks including Canadian Solar (CSIQ) and JinkoSolar (JKS) have given up 7% this week as another bout of selling has settled in.
So is the run over for the sector? Or will these gains stick for solar stocks, simply providing investors with decent buying opportunities on the inevitable corrections?
I think it’s the latter. Solar stocks have a lot to offer right now, even after the run, and could be great bargain buys on significant pullbacks.
For starters, let’s acknowledge that volatility is par for the course among solar stocks. Since 2009, domestic leader First Solar (FSLR) has traded for as much as $190 and as little as $12 a share. It’s now about $46 — meaning some investors made tremendous profits and others assuredly lost their shirt along the way.
However, there are hints that solar is heating up and here to stay. Here are five reasons to be bullish on the sector:
Expensive Oil: Crude remains over $100 after hitting three digits for the first time in more than a year after unrest in Egypt, Turkey and elsewhere boiled over in the Middle East. Solar energy obviously isn’t as attractive in an era of cheap fossil fuels, so this dynamic helps create a floor for solar stocks. And seeing as there doesn’t appear to be stability around the corner in the region, expect this risk premium to stay in crude oil pricing.
Bullish Analysts: There’s some positive sentiment on Wall Street right now for big solar names, including this bullish report from Nomura on Canadian Solar and a positive outlook for the whole sector from Deutsche Bank . And Orips Research just called attention to upside in JinkoSolar based on the charts. Granted, the smart money isn’t always right … but the trend of optimism is worth noting.
Stronger Demand: This week, Canadian Solar won a big contract to install modules in a Louisburg, N.C., energy project. And bigger-picture, the Solar Electric Power Association recently estimated that annual overall solar capacity passed 2 gigawatts in 2012 and that “the market share for large-scale solar projects grew 160 percent to 1,130 MW from 2011.”
Tariff Tensions Ease: At the beginning of June, the solar market was shaken up as the EU announced tariffs on Chinese solar panels. But this week there was news that China will not impose tariffs on imported polysilicon used to make solar panels in an attempt to ease tensions. The West has long accused China of depressing prices for domestic solar companies by flooding the market with cheap solar gear and an end to trade tensions altogether is unlikely. But the fact that recent events haven’t escalated is encouraging.
China Consolidation: Along the same lines, Chinese solar stocks have benefited from government largesse. But recently, Beijing crafted new rules that are highly favorable toward consolidation via mergers and acquisitions rather than just all-out subsidies for the solar industry there. That might narrow the playing field as those remaining China stocks have fewer competitors at home and broader reach as a result
Bigger-picture, it seems a good bet that solar energy is a growth industry. Carbon emissions remain in the crosshairs of regulators, sustainable energy is talked about as one of the few growth areas in the global economy, and many of the stocks mentioned here could be powerful long-term plays if the chips fall right.
Just make sure you’re patient if you choose to take this solar bet, since short-term volatility is sure to persist.
- On the other hand, Raymond James warns the sector is not out of the woods. (Barron’s)
- John Udovich makes the case for his favorite solar stock right now. (Small Cap Network)
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.