Three Reasons Solar Sell-off May Be in Early Innings

by: Kelvin Schulle September 03, 2008 | about stocks: ENER / ESLR / FSLR / LDK / SPWRA / STP    

Kelvin Schulle

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Renewable energy had a great run over the last month when oil was seen stable at the $115 level. Suntech (STP) gained almost 50% from $32 to $49, SunPower  (SPWR) gained almost 40%, LDK Solar (LDK) gained about 50% and Energy Conversion Devices (ENER) is up over 110% since May 2008. Overall solar has been really outperforming in the past year when you compare it to other sectors, such as financial and retail, as both have been down big during the same period of the year. However, solar becomes a risky investment in the current environment. Here are three reasons the solar sell-off may just be getting started:

1. Crude oil breaks below $110 and the US dollar is strengthening

Perhaps the major reason solar became a popular alternative energy resource was soaring crude prices. In the last 12 months crude prices have more than doubled. Since crude peaked at $147, the solar sector has started its pull-back. However, solar investors were betting that crude would stabilize above $115. This turned out not to be the case. The US dollar has become stronger and stronger and global demand for oil continues to drop, which has pushed crude below $110 in the aftermath of a tamer-than-expected Hurricane Gustav. Crude is likely headed below $100 in the short term. This will eventually trigger a serious sell-off in renewable energy sectors including solar and wind. In fact, many analysts are predicting $80 crude in the next 6-12 months, all but assuring a sell-off in alternative energy sources.

2. McCain/Palin likely a final killer of solar energy

Sarah Palin is known as a supporter of "drill drill drill". McCain's pick of Palin sends a signal to voters that even cheaper oil is on its way with offshore and ANWAR drilling becoming reality if McCain/Palin win the election. Recent polls show McCain closing the gap with Senator Obama, and more voters are turning to the Republican position in favor of offshore drilling. If more drilling is planned under a Republican administration, the proposed federal solar subsidy may never be passed.

3. Solar stocks are not cheap

At current valuations, solar stocks are not cheap at all. Take a look at Energy Conversion Devices (ENER), for example. The company made 23c per share last quarter with revenue of $80M; its market cap is at a lofty level of $3.3B. Based on 16 analysts covering this company, 2008 earnings estimate is for $1.3 per share, equivalent to a forward PE of 57. Similarly high forward PEs can also be seen in other solar, such as First Solar (FSLR) [FPE of 60] and SunPower (SPWR) [FPE of 41]. LDK Solar (LDK) stands out from the pack with a forward PE of just 19.

Without a turnaround in oil prices or an Obama win, valuations in the solar sector are likely to fall from current bubble levels, which is to say a long, long way from current levels.

Disclosure: None

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This article has 62 comments:

  •  
    Sep 03 09:42 AM
    Agree with Kelvin's insight that solar plays are a bubble now and may fall substantially. The market facing deflation and great uncertainty is no mood for lofty PE ratios unless the story is so compelling.
    Reply | Link to Comment
  •  
    Sep 03 09:46 AM
    Disagree.

    Crude will not drop to levels you are talking about.

    Goldman has a year end target of $149/barrel for crude. Boone Pickens states categorically that oil will not fall below $100/barrel.

    Reply | Link to Comment
  •  
    Sep 03 09:49 AM
    not even talking about oil or whatever...I would not go short solar names THE day where spanish subsidies are supposed to be voted. WATCH OUT 17h30 Spanish time. Anything above 300MW for the cap and you will have a rally on SPWR, YGE, STP...good luck
    Reply | Link to Comment
  •  
    Sep 03 09:51 AM
    Also the move towards renewable energy is irreversible. It is now a global mindsent to walk away from fossil fuels. Every city, state, government has now either a mandate or putting one in place on renewable energy production.

    China/India demand which has been largely ignored in the oil sell-off will come into picture. Also the recent drop in pump prices is causing Americans to increase consumption. In the next few weeks you will see a renewed growth in American consumption and this will end the current oil selloff.
    Reply | Link to Comment
  •  
    Sep 03 09:53 AM
    Total crap.

    1. solar was growing when crude was at 70USD
    2. McCain/Palin would be a disaster for the world, just as Bush Halliburton.
    www.guardian.co.uk/wor...
    Reply | Link to Comment
  •  
    Sep 03 09:57 AM
    Curious, because oil and electric have an oblique, almost non-existent relationship.

    Almost NONE of our electric is generated by oil! Only on Puerto Rico, Hawaii and Catalina Isl. does oil have anything to do with generating electric.

    The only relation is that extraction and refining oil takes a LOT of electric power; but that should only increase the price of electric, and make going solar even more attractive.

    Hint: oil drilliing does not result in lower interest in solar, except in the ignorant!
    Reply | Link to Comment
  •  
    Sep 03 10:00 AM
    If you think of the % of the energy market that solar power represents, it is very, very small. Investors were clearly too happy with this sector. I agree. SELL or SHORT.
    Reply | Link to Comment
  •  
    Sep 03 10:03 AM
    I don't think a McCain presidency means we won't do as much solar. Fact is the industry's running flat-out, and that's likely to continue no matter who wins. As a fan of the drill-drill-drill idea, what I would say about my side of that issue is that we need to be realistic about how long it will take before we have enough solar capacity (and electric cars) to make a dent in our oil demand, so we need more production to get us through the next 10-20 years. That is in line with what both McCain and Palin are saying. Meantime, the real competition for solar isn't oil, it's nat gas. Power companies unable to use the cheapest source (coal) have been turning to gas in droves over the past 10 years. Nat gas is cheap and getting cheaper. All that said, valuations in the solar sector are stratospheric.
    Reply | Link to Comment
  •  
    Sep 03 10:22 AM
    This dude is in serious need of spell check. Can something this poorly written be given much validity?
    Reply | Link to Comment
  •  
    Sep 03 10:28 AM
    You are a moron. Silicon prices are headed way down and in 2 years time grid parrity will have already been met in countries like Spain and Italy. Solar panel prices are headed down in lieu of lower silicon costs and better solar efficiencies. The price of oil even at $80 a barrel if it should make that far is still twice as high as almost 2 years ago. I suggest that you take your brains out of your ass and stop smoking crack for the basis of your article has absolutely no merit.
    Reply | Link to Comment
  •  
    Sep 03 10:28 AM
    I have been following the solar industry for 30 years. It's a shame that some of you still don't get it. The whole world is going solar. Economies of scale are here. This is analogous to the early stages of the automobile industry. Some of you are still basing your decisions on the cost of horse buggies. The Chinese get it. They are making sound long-term investments. We should follow suit. Some of you day traders may make money jumping in and out. But solar is the single best long-term investment for my money. Companies like LDK and STP will be selling at $120-$150 by the end of 2009. Meanwhile, I'd like to thank the nay-sayers for allowing me to accumulate more...
    Reply | Link to Comment
  •  
    Sep 03 10:28 AM
    Solar effectiveness is on the increase, electricity prices and gas prices up 40% this year.

    Electric/hydrogen cars on the increase.

    You'd be a fool to short solars no matter what.

    Anyway I'm personally buying more solar panels.
    Reply | Link to Comment
  •  
    Sep 03 10:39 AM
    Switching to Solar Energy is not about Oil below $100 but it is about investing in protecting the environment.
    Vinod Khosla has been venturing in Alternate Energy when oil was at $50 and he has lots of credibility.
    Reply | Link to Comment
  •  
    Sep 03 11:19 AM
    I think the argument the author is laying out against solar is a fairly short-term one. He never claims solar won't be a great business down the road. But if oil continues to plummet, Solar's high valuations will not be sustainable.

    Value is about what a business is trading for relative to what it's really worth - even the greatest business can be overpriced and the worst underpriced. And at current and future PEs, solar profits need to keep growing at an insanely fast rate to sustain current valuations.
    Reply | Link to Comment
  •  
    Sep 03 11:27 AM
    solar sell-off has just started?? Did the author even bother to look at the charts?`that supposed rally of STP, LDK etc. that he is talking about followed a hefty 50-70% decline prior to it. So you could argue the severe decline has resumed but certainly it hasn'T started the 'first innings' !
    Second: All that short-term speculation about obama!/McCain killing or not killing solar is just dumb. sorry to say it so explicit, but that's what it is. Solar is not a replacement of oil nor will $70, $100 or $150/bl decide the fate of solar. Solar is set to arrive in a big way due to the longer term trend of switching to renewable, clean alternative energy sources.
    Europe encourages solar while oil was at 30-40$/bl. that the USA completely missed the trend due to way too cheap gasoline and little incentives to develop solar is the USA's problem.
    Bottom line: hedgefunds and momentum crowd may chase solar stocks up or knock them down. longer term, the most robust and best managed ones will shine big time. So to some solars, it will be resumption iof a lethal downfall. To others, it will be another correction on the way up.
    Reply | Link to Comment
  •  
    Sep 03 11:41 AM
    Short solar. The bulls who comment make me laugh - they know everything about solar except valuation. Buy stocks when they're cheap, sell 'em when they're dear. Solar stocks are wonderful indeed, but they are ridiculously expensive. Sell, sell, sell!
    Reply | Link to Comment
  •  
    Sep 03 11:50 AM
    The failure to distinguish between Chinese solars such as SOL and LDK (13P/E and 19P/E) and ridiculously low forward P/E's and stocks such as FSLR and SPWR (94P/E and 134P/E is hardly good critical analysis. Again the vertical intigration, booked sales, lower smelting costs, subsidies and potential US energy subsidies for renewables makes any value play in the sector phenomenal. I believe this author is short on some or all of these stocks. The linkage of Solars to Oil futures prices is emotional not tangible, insofar as it has the appearance of reducing urgency for the US Congress to legislate on it. I do not think this is a serious factor as both parties, and particularly the Dems have virtually promised major renewable energies legislation in their convention. And being as how the Dems have this election to lose, as they look pretty well locked, I would bet on serious legislation no later than Jan. '09 if not sooner. Sorry to say, I think this article has an agenda and is nearly useless for analysis sake.
    Reply | Link to Comment
  •  
    Sep 03 11:51 AM
    This article is very poorly researched or the writer is a lying wannabe manipulator. Check out the forward PE he gives for LDK. The number he gives is higher than it's trailing PE.
    Reply | Link to Comment
  •  
    Sep 03 11:55 AM
    Both Republican and Democratic candidates have promoted energy policies that encompass many different energy sources. Drilling does not preclude solar. In fact, both candidates have publicly stated that all forms of energy must be utilized to our country to reduce imported dependence on oil. Solar is no longer pie-in-teh-sky. STP is making HUGE profits as one of the most efficiently run energy companies on the planet. Low labor costs in China are a big part of their success. Recent pullbacks are not a sign of problems, it is a basing for greater things to come. Look at STP's 1-2-3 pattern of higher lows with decreased volume on pullbacks. It will break upward resistance at about 48 and short covering will come into play in a big way. The need for clean energy in China, Europe, and now even more in the US will drive this company's success going forward.
    Reply | Link to Comment
  •  
    Sep 03 11:58 AM
    Solar stocks, while I believe in the story, are bubblicious right now. FSLR in particular is priced for perfection, one hiccup and its a 50 point haircut.
    Reply | Link to Comment
  •  
    Sep 03 12:03 PM
    Not sure about the logic behind the McCain/Obama discussion. Even if new drilling provides another 3 million barrels a day, that doesn't influence the total amount of oil available on a worldwide basis a lot particularly considering that production of oil by existing U.S. wells will probably decrease by nearly that much. However, it does help the U.S. trade deficit a lot and helps the U.S. Treasure significantly.
    Reply | Link to Comment
  •  
    Sep 03 12:05 PM
    With the global economy slowing, if oil prices are really a supply/demand issue, then if demand drops price should drop as well. bizzywomen.com/
    Reply | Link to Comment
  •  
    Sep 03 12:37 PM
    I would be looking at the bi-partisan New Energy Reform Act of 2008 (New Era Bill) that will be taken up in Congress when they get back together. The basic trade is drilling for extension of the renewable subsidies. Not a bad trade at that. Solar will sky.
    Reply | Link to Comment
  •  
    Sep 03 01:02 PM
    I am from this industry. The demand is going to accelerate substantially as long as price of crude stays above 65$/barrel which is the price that most customers are using to make pay off calculations.
    With due respect to the author and all the analysts, I am surprised how little of their analysis is based on factual information gathered from the market (ie. customers).
    The big players - either volume plays or technology plays - will dominate going forward and will continue to see extremely robust expansion.
    Reply | Link to Comment
  •  
    Sep 03 01:07 PM
    I dont agree. The democratic congress may still prolong the subsidies and the valuations of the chunese solar stocks are very low!
    Reply | Link to Comment
  •  
    Sep 03 01:33 PM
    I think the price of oil may go below $100\barrel for sometime, but its not going to stay there. Unless, the world economy collapses oil will be back to $140\$150 range by next summer again if not higher. Solar is here to stay and demand for solar will continue to increase.

    Even if Obama does not win, the dmocratic majority in senate and congress is likely to increase and thus there's no reason to believe solar subsidies will not pass. I still think, Obama's going to win.
    Reply | Link to Comment
  •  
    Sep 03 02:19 PM
    The same thing happened again:

    I did not see any bearish view on solar last two weeks when they are in uptrend.

    Whenever they are in the bottom, bashers appeared.
    Reply | Link to Comment
  •  
    Sep 03 02:32 PM
    No, you have no idea of what you speak. If you think the American public will elect McCain, you are truly out of touch. In Europe bets are being taken as to when Mc Cain dumps Palin. The American public is dumb enough to go through another 4 years of a Bush-like presidency. And, oil is not going to remain at its per barrel price for long. This is a finite commodity. If we did drill right now it would be years until it affects oil prices, if then. I put absolutely no credence in your evaluation. None at all.
    Reply | Link to Comment
  •  
    Sep 03 02:43 PM
    Natural gas is now in a glut situation and will be for many years to come in the USA. There have been some very recent major finds in Louisiana (Haynesville) and Texas (Barnett Shale), with reserves of hundreds of trillions of cubic feet of reserves. This is going to put pressure on all energy prices, esp. gas and oil, since many installations (including power) will continue to convert to gas. So you can kiss goodbye to high solar prices too, and kiss goodbye to high priced solar stocks. Buy 'em when they're cheap, sell 'em when they're dear. For example, the time to buy ENER will be when it fills the massive gap at $36, which represents about a 40% haircut from here. That will be the signal I'm looking for to say that solars have hit bottom. Maybe by next spring we can buy again, for now take your profits to the bank (or your losses to the dumpster).
    Reply | Link to Comment
  •  
    Sep 03 02:44 PM
    selloff in solar because of valuation - what is this simplistic generalization?
    we get examples like FSLR ENER..., but what about SOL WFR TSL that trade with PE's close to 10 for this year and many others that are well below?
    most of this forward estimates are based on oil at 90-110. so companies that are growing well above 20% and have PE's in the teens or lower are overvalued?
    let's get real and stop being like deers in the headlights. we will always get price flactuations since this is the nature of the market. read about it in articles that deal with market psychology.
    are we in the first inning of major selloff? only time will tell. if it does it will be confluence of events that will drive the selloff. they will all create enough fear to make it happen.
    saying that the selloff is because oil dropped to 100$ or the wrong claim of overvaluation (the wrong claim is because of the generalization, there are few that sure are overvalued), is just small part of what is driving and what will keep driving stock prices in the solar industry or in many others.
    Reply | Link to Comment
  •  
    Sep 03 02:48 PM
    Spwr CEO must have been drinking at the solar power confrence in Valencia. He said that he expects the sales prices to drop 10-20%. Altogether now, say it together this one's going to crash and burn look out below.
    Reply | Link to Comment
  •  
    Sep 03 02:52 PM
    Here we go again with lots of talk about "solar"! Solar is an adjective, not a noun - when discussing solar technology stocks, please let's be specific:- PV, heating, boiling with parabolic mirrors, corn, cellulose, algae and anything else you can think of!

    @english fan - sad to say, bad spelling and typos are almost the norm these days. It's been almost 60 years since I got slapped around in class by an English teacher for mis-spelling a word twice. So, my spelling is pretty good ;-)

    I agree with all those who say the USA has to encourage all forms of energy production because, gentlemen, bad times are just around the corner, IMHO.

    T.C.
    Reply | Link to Comment
  •  
    Sep 03 02:54 PM
    realistic guy: You have no clue about politics and what "America" wants. To call someone dumb or ignorant because they vote a certain way makes you the ignorant one as you are unable to see and evaluate the issues and make an informed choice. The liberals are scared and pissed off because Obama couldn't put his pride in check and put Hillary on the ticket, which was truly a no brainer as that would be the winning ticket. So McCain put a woman on the ticket smacks them all hard. McCain will win and America and the world will be better for it.
    Reply | Link to Comment