Get TAN-ing With This ETF, Because Solar Stocks Are Cheap

Solar equities have been embroiled in controversy this year, much of it thanks to Sunedison Inc SUNE, which according to some reports, has retained a bankruptcy firm. That stock has lost nearly 93 percent of its value this year, so it's probably not surprising that the Guggenheim Solar ETF TAN has not been able to skirt that situation.

TAN, the benchmark solar ETF, is off more than 26 percent this year. Forgive the pun, but that does not mean the sun will not rise again for TAN and its holdings. And no, shares of SunEdison no longer reside in TAN. The ETF devotes the bulk of its weight to steadier solar fare, such as First Solar, Inc. FSLR and Elon Musk's SolarCity Corp SCTY. Those two stocks combine for over 14 percent of TAN's weight.

Related Link: Picking Winners After SunEdison Crash: Canadian Solar And Solar Edge?

While the metaphorical weather has been mostly stormy for TAN this year, there is some benefit to the ETF's struggles: rarely seen (and low) valuations on some of the stocks found in TAN.

A Break In The Clouds

“Solar stocks are currently trading at bargain-basement prices compared with the broad market. The median trailing P/E of companies in the MAC Solar Index is currently 11.6, which is well below the P/E of 18.8 for the companies in the S&P 500 index. The median price-to-book ratio of 1.04 for the companies in the MAC Solar Index is well below the 2.81 ratio for the S&P 500. The median price-to-sales ratio of 0.96 for the MAC Solar Index is well below the 1.84 ratio for the S&P 500,” according to MAC Solar Index, the index provider for TAN's underlying benchmark.

Another catalyst widely viewed as positive: Earlier this year, Congress introduced legislation that includes an extension of the solar investment and wind protection tax credit. Solar stocks still have an oil problem— as in falling oil prices are problematic for the solar industry because inexpensive oil takes some of the shine off alternative fuel sources.

In January, Barclays said it is “broadly positive on the solar space due to the combination of policy certainty supporting demand and weakness in energy prices providing an attractive valuation entry point.”

“Despite the recent weakness in solar stock prices, the global solar industry itself continues to show strength. Global solar has grown at a very strong +25 percent compounded annual rate over the last five years. Meanwhile the long-term demand outlook for solar remains very strong since solar will account for 35 percent (3.439 GW) of all electricity capacity additions and a massive $3.7 trillion of solar spending through 2040, according to Bloomberg New Energy Finance (BNEF). Moreover, BNEF expects all-in project costs for solar to plunge by another 48 percent by 2040, thus making solar one of the cheapest sources of electricity,” added MAC Solar Index.