If your clients can stand the volatility, now would be a good time for them to consider investing in the stocks of solar energy companies. Shares in many of the sector’s leading firms have been trading at exceptionally low price/earnings multiples, thus reducing the potential risk.
In addition, governments have been prompted to consider bumping up their investments in solar energy. The prices of other forms of energy, especially oil, have been rising rapidly; the failure of nuclear power stations in Japan following the devastating earthquake on March 11 also has had an effect.
This is all just as well because generous government incentives — particularly in Germany and Italy — are still the main catalysts for this sector. Bloomberg LP analyst James Evans estimates the global market for solar-power installations will reach 15.5 gigawatts in 2011, up by 40% from 2010. Although that’s down from the year-over-year growth rate of 67% in 2010, it’s still respectable. Evans reckons that Europe will account for 55% of the market in 2011, with the U.S. and China representing 13% and 7%, respectively.
Solar power’s industry revenue isn’t rising as rapidly as volume sales, but only in part because prices for key solar system components are dropping. The other factor is intense competition, particularly from a group of new, low-cost suppliers in China.
Your clients can buy a piece of the action through American depositary shares on the New York Stock Exchange. There are risks, of course — not least of which is that China-based firms have been public entities for only a short time, making it difficult to evaluate management properly.
The most conservative way to invest in this sector is through an exchange-traded fund, such as Guggenheim Solar ETF, sponsored by Guggenheim Funds Distributors Inc. , or Market Vectors Solar ETF, sponsored by Van Eck Associates Corp.
But your clients should be aware that “conservative” does not mean “stable.” While the S&P/TSX composite index fell by almost 50% during the credit crisis in 2008, solar stocks plunged by 84%, as measured by Guggenheim Solar ETF. Nor have share prices in solar-technology firms come anywhere close to recovering; Guggenheim Solar ETF was still 73% below its 2008 peak on March 4, while the S&P/TSX composite index was approaching full recovery.
If we look at the past year, Guggenheim Solar ETF earned a roughly break-even result. But the overall average return disguises a lot of volatility among the top solar-technology firms — at least, those that trade on U.S. stock exchanges.
The top stock during the year ended March 4 belonged to LDK Solar Co. Ltd. of Jiangxi, China, which returned 95.8%. One of the worst performers was Suntech Power Holdings Co. Ltd. of Jiangsu, China, which saw its share value tumble by 34.5%. The relative fate of these two stocks was no accident. LDK specializes in making wafers, the main raw material used to produce solar cells, which convert sunlight into electricity. Cells, in turn, are used to create modules that form complete solar systems. The price of wafers has held up relatively well, creating cost pressures for firms such as Suntech, which has to rely on outside suppliers for its wafers.@page_break@Clearly, picking the right stocks in this sector can pay off. Only four of the 12 solar stocks surveyed by Investment Executive were rated a “buy” for 2011 by the majority of analysts who cover them, and only two of these were rated as “very strong buys.”
Topping the list is Trina Solar Ltd. , one of China’s solar pioneers. The firm, located in China’s Jiangsu province, started operations in 1997 as an installer of solar systems; it went public in 2006. Trina is one of the few firms that makes all of the pieces necessary for a solar project, such as silicon ingots, wafers, cells and modules. However, the solar sector’s growth has been so fast, Trina has had to outsource a portion of its production to third parties in order to meet demand.
On Feb. 22, Trina forecasted it would ship between 1.75 GW and 1.8 GW of solar photovoltaic products in 2011, which is up by at least 65% from 2010, when it shipped 1.06 GW. This is on top of an increase of 165% in 2010.
Trina’s revenue is also rising sharply. Last year, it jumped by 120% year-over-year to $1.86 billion (all figures are in U.S. dollars), and Standard & Poor’s Corp. forecasts another 53% rise in 2011. Trina’s earnings in 2010 were $4.18 per ADS vs $1.69 per ADS in 2009. Mark Bachman, an analyst with Auriga USA LLC of New York, forecasts earnings of $4.13 per Trina ADS for both 2011 and 2012 in his Feb. 23 report.
Although Bachman is projecting flat earnings, he has a “buy” rating on the stock, with a price target of $41 vs its $27.11 close on March 4. His rationale is that Trina’s 6.5 P/E ratio is too low, given its leading position in a growing industry. Bachman reckons the firm’s P/E multiple will rise to 10 within a year as investors grow more comfortable with solar energy’s longer-term prospects.
The No. 2 rated firm, according to analysts, ReneSola Ltd. of China’s Zhejiang province, was trading at an even more anemic 4.7 times trailing earnings in early March. ReneSola was launched in June 2005 and went public on the NYSE in January 2008. Rene-Sola’s specialty is solar wafers, but the firm expanded into solar cell and module production in 2009 by acquiring JC Solar.
ReneSola shipped 1.2 GW of wafer and module production last year, up by more than 125% from 526.6 megawatts in 2009. Revenue jumped to $1.2 billion from $510.4 million. Earnings were $1.93 per ADS in 2010 vs a net loss of 98¢ per ADS in 2009.
However, ReneSola disappointed investors somewhat when it offered cautious guidance for the year ahead. Company officials predict shipments of solar wafers and modules would reach only 1.6 GW to 1.7 GW in 2011, representing relatively modest growth of 35%-44% year-over-year. IE
Future is bright for solar energy stocks
Rising oil prices and a nuclear energy crisis in Japan are leading many investors to shine a light on solar energy stocks
- By: James Bagnall
- April 4, 2011 October 31, 2019
- 14:34