Solar energy stocks are going to make a handful of investors very rich one day. The question is when.
Over the long term, the basic appeal of solar is not hard to figure out. In spite of global slowdown concerns, the possibility of deflation, and even the odds of a flat-out China crash, we still live in a peak oil world.
As you have heard before, all the "easy" crude oil is gone. What untapped crude oil remains is often in the hands of poorly run NOCs, or national oil companies. Or else it exists in a form that is expensive to extract, like oil sands or shale.
Add in the Middle East instability factor — a recent NYT Magazine headline read Yemen on the Brink of Hell — alongside paper currency debasement and emerging market demand, and you get a guaranteed recipe for long-run expensive crude oil. This naturally makes solar energy stocks competitive — even highly competitive — as an alternative energy source.
Right now, though, solar energy stocks are cheap and looking cheaper. From 2008 highs above $30 per share, the Guggenheim Solar ETF (TAN) has fallen below $7, shedding more than 75% (three quarters of its value). What is going on there?
At the moment there are at least three heavy weights pressing down on solar: fears of government cutbacks, fears of panel gluts and worries over China fraud.
Will Austerity Short-Circuit the Cleantech Boom?Earlier this month, Fortune magazine wrote:
“As federal stimulus spending dries up, the clean tech industry faces a 'funding cliff' at the end of this year that could jeopardize one of the few economic sectors that is producing job growth, according to a report issued by the Brookings Institution.
Such is the peril when an industry is supported by fickle government financing (as opposed to the more reliable, if far less needed, government financing enjoyed by industries like agriculture and petroleum).”
The basic fear is that Western governments, in their drive to save money, will put green energy budgets under the knife more quickly than other areas of spending. This is also a threat in European countries like Germany, Spain and the UK, where subsidized solar products are at risk.
In balance to this threat, there is hope that China can keep the solar industry afloat. In June of this year, two Chinese banks committed to $10 billion in funding for solar projects in Europe. Tim Yiu, executive director of a China-based solar cell maker, reported, "We feel confident that we will be leading the next golden decade of solar energy development."
In addition to China financing, the political fallout in the nuclear industry is good for solar. The German government, for example, is committed to phasing out nuclear power use by the year 2022. Whether that plan is feasible or not, solar usage should get a boost from it.
Questions abound, though, as to whether China's deep pockets will be enough to support the solar industry in the near term. When China goes through its own internal crisis, will there still be the funding and political will to aggressively support solar expansion in countries abroad?
China Fraud Bleeds Into SolarAnother, more serious short-term problem for solar is a fear of bogus numbers. As Bloomberg reports via Solar Brings Muddy Waters Concerns to Panel Makers:
“Investors are starting to doubt profit estimates for China's solar manufacturers as concerns about accounting practices first spotted at a forestry company spread nationwide.
Directors leading audit committees quit LDK Solar Co. on July 18 and at its rival Trina Solar Ltd. (TSL) on July 12. Moody's Investors Service on July 11 cited "accounting risks" at five Chinese companies including LDK. Muddy Waters LLC, a Hong Kong researcher, on June 2 accused Sino-Forest Corp. (TRE) of inflating its timber production.”
Muddy Waters is the name of a research firm specializing in fraud investigation. John Paulson, who runs one of the largest hedge funds on the planet, lost $107 million in Sino-Forest Corp. as a result of a Muddy Waters report.
With audit committee directors walking out the door, there are clearly fears that one or more Chinese solar names could suffer the same fate as Sino-Forest. Adds Bloomberg: "Eight Chinese companies in the 17-member Bloomberg Large Solar Index have declined 13 percent since the Muddy Waters note..."
But what about the incredibly low multiples? "Some multiples are low because they are mirages," Shawn Kravetz of Esplanade Capital tells Bloomberg. "If you get up close, the reason the earnings look so cheap is because the earnings won't be there."
Opportunity in the Bargain BinOn top of all the above, short sellers have been piling on various solar names in expectation of a "panel glut" as oversupply hits Western markets.
What you get, in sum total, is an industry that is feared and loathed for the moment. But solar remains an intriguing area to watch because (1) not all solar companies are frauds (though tarred with the same brush) and (2) the long-term solar case remains compelling.
At some point, the challenging economics of crude oil — and, let's face it, Wall Street's need for another boom, possibly a "cleantech" boom — will light a fire under solar names. Keep an eye on the space.
Written by Justice Litle for Taipan Publishing Group. Additional valuable content can be syndicated via our News RSS feed. Republish without charge. Required: Author attribution, links back to original content or www.taipanpublishinggroup.com.