Market Overview

Solar Stocks were Beaten in 2011; to Repeat in 2012?

Solar stocks have been beaten in recent months. Within the last year, the Claymore/MAC Global Solar Index [ETF] (NYSE: TAN) is down more than 65%.

Us as consumers can even get a 30% Federal tax credit though December 2016 if you install solar panels on your roof. However, sadly, consumers will not create the demand needed to fuel the industry themselves; the solar industry needs major corporations to join in.

With human ideology changing, one would think there would be a push of more demand for renewable, clean ways to create energy, and it has. According to a USA Today report, clean technology investments rained down in 2011. Citing the Cleantech Group, North America accounted for 76% or $6.8 billion of the global clean tech investments. This is up 25% from 2010.

So why are solar stocks down so much?

Well one big reason was the Solyndra bankruptcy back in September, but what exactly happened?

The California-based Solyndra certainly seemed to be in good shape when it raised more than $1 billion in private equity, won a $535 million loan guarantee from the federal government, and then built a 1 million square foot factory, employing 1,100 workers. Apparently not.

The San Francisco Business Times quoted Alain Harrus, a venture capitalist with Crosslink Capital, who said that Solyndra's demise was ultimately inevitable.

“The price decrease in modules has been so severe -- so drastic, from the get-go, when Solyndra got started it made sense economically, but in last year and a half it was completely upside down.”

One publically traded company which has seen most of the mayhem is First Solar (NASDAQ: FSLR). Once deemed one of the strongest stocks in the industry, now First Solar is down to just another competitor.

It started back in October when First Solar's then CEO Rob Gillette decided to step down. The stock fell over 15% soon after.

Then, First Solar reported third quarter earnings that missed analysts' view. The company reported Q3 EPS of $2.25 per share on $1 billion in revenues. Wall Street had been expecting earnings of $2.64 per share on $1.01 billion in revenues.

At that time, it also cut its 2011 full year earnings. First Solar announced it expected to earn $6.50-$7.50 per share, down from the $9-$9.50 per share the company previously saw. Wall Street expected earnings of $8.84 per share, at that time.

Continuing its trend of poor news, First Solar again cut its 2011 outlook on December 14, 2011.

First Solar now forecasts 2011 net sales in the range of $2.8 to $2.9 billion, down from the company's prior guidance range of $3.0 to $3.3 billion, and expects diluted earnings per share for 2011 to be in the range of $5.75 to $6.00, down from prior guidance of $6.50-$7.50.

As we stand currently, the solar industry depends largely on government subsidies in order to operate, even though input costs, mainly the solar modules, are coming down in price.

To add insult to injury, a headline crossed today, saying that Germany will likely cut solar subsidies by 30% in 2012. On November 3, 2011, First Solar announced that its second plant in Frankfurt reached full production, which doubled its production in Germany.

If things continue to get worse in Europe, look for more countries to cut incentives for the solar industry.

Benzinga contacted Adam Krop, solar analyst at Ardour Capital, for his take on the industry.

"In regards to German solar subsidies, they are set up to digress every year," Krop said. "Germany lowers its solar subsidy program every year by a certain percentage, depending on industry demand."

"We don't expect solar sector equities to bottom until 2H12," Krop continued. "We currently are forecasting 22 gigawatts of demand in 2012, versus supply of about 40 or more gigawatts. So we believe the sector will remain under pressure for a little while longer."

He concluded, “The European market peaked in 2010 and is no longer the volume growth driver for the solar industry. We look for China, India, Japan and US to be the growth drivers going forward.”


ACTION ITEMS:

Bullish:
Traders who believe that investments in clean energy will continue to grow, you might want to consider the following trades:
  • If you think subsidies for clean tech will not shrink and investments will continue to grow you might want to check out the PowerShares Cleantech Portfolio (NYSE: PZD)
  • If you think First Solar is still the leader in the solar industry and abelieve the recent sell-off is overdone, try longing shares of First Solar (NASDAQ: FSLR) or buying 2013 call options.
Bearish:
Traders who believe that subsidies will continue to be cut for clean tech, you may consider alternative positions:
  • If you think Europe will continue to struggle and in turn subsidies in clean tech will be cut, trying shorting the iShares S&P Global Clean Energy Index ETF (NASDAQ: ICLN)
  • If you think this is just the beginning of the clean energy sell-off, you might want to short shares of Sunpower (NASDAQ: SPWR) or buy 2013 put options.
Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

Follow me on Twitter @bpilzner

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