Market Overview

Solar ETF Searches For Sunny Days

Solar ETF Searches For Sunny Days

Underscoring just how tough this year has been on solar stocks, the Guggenheim Solar ETF (NYSE: TAN) fell nearly 1 percent Wednesday, the same day investors absorbed news of Tesla Motors Inc (NASDAQ: TSLA) bidding $2.8 billion for SolarCity Corp (NASDAQ: SCTY), one of TAN's largest holdings.

Is TAN About To Get Burned?

TAN has been stymied on multiple fronts this year. In previous periods of rising oil prices, solar stocks and TAN have participated in some of that upside, but that is not the case this year. Second, short sellers have been voraciously attacking some TAN constituents, a frequent occurrence with this exchange traded fund, and winning.

Related Link: Tesla's Acquisition Of Solar City Would Be "Groundbreaking"

Additionally, TAN's 33.4 percent year-to-date loss belies what some view as encouraging solar sector fundamentals and compelling valuations.

For example, 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's "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."

Blistering Risks

Unfortunately, an array of factors is weighing on solar stocks and TAN.

According to MAC Solar Index, the index provider for TAN, “Solar stocks have recently seen weakness due to"

    1. "The general risk-off equity trading mode with the upcoming Brexit vote and the ongoing concerns about the Chinese and global economies
    2. "Concern that a temporary drop-off in Chinese solar installs in the second half of 2016 could lead to supply overhang and downward pressure on solar pricing
    3. "Uncertainty about whether the EPA’s Clean Power Plan will ultimately survive the presidential election and its court challenge
    4. "Uncertainty for the U.S. residential solar market amidst a shift to loans from leases and cutbacks in net metering in some states
    5. "Investor uncertainty about the solar sector after SunEdison filed for Chapter 11 in April
    6. "Ongoing trade disputes that have resulted in tariffs and various market dislocations"

It's Not All Bad

There is some silver lining. For example, TAN's holdings are inexpensive. At a price-to-earnings ratio of 9.4, the ETF's are significantly less expensive than the S&P 500, which trades at a P/E of over 17.

“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,” noted MAC Solar Index.

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