Solar stocks are notoriously volatile, and a number of picks in this sector have seen massive gains lately.
- First Solar (FSLR): up 70% in the last year.
- Yingli Green Energy (YGE): up 80% in the last year.
- Trina Solar (TSL): up 190% in the last year.
- Sunpower (SPWR): up 290% in the last year.
- Canadian Solar (CSIQ): up 740% in the last year.
Still, the big gains in these solar stocks isn’t a sign that all is bright for the sector.
And if you’re sitting on a doubler or tripler — or in the case of CSIQ stock, a lot more — it might be time to pare back your solar holdings.
While solar was red-hot in 2013, the sector might not have much more headroom. A supply glut that had characterized the market in previous years ended in 2013, as solar technology couldn’t keep up with demand after inventories had been held quite low.
This was great for investors last year, but it’s highly unlikely that trend will continue in 2014. The best-case scenario is that pricing and inventories have normalized and that comps will start to get more difficult … and the worst-case scenario is that production ramps up among solar stocks, demand drops and oversupply sets in again.
And bigger-picture, the recent cracks we’ve seen in the stock market and disappointing jobs numbers could hint at trouble ahead. Demand won’t be very robust if sentiment continues to deteriorate, given the big up-front costs for some solar power installations.
Lastly, anyone who has watched solar stocks for a long time knows how volatile this sector of the market can be. When the sun is shining, you can double your money in a hurry. But when things change … you can lose your shirt.
Tread lightly in the entire solar space right now, but particularly in Canadian Solar and other high-fliers that simply can’t keep up that momentum forever.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.