In my earlier essay entitled Solar Stocks: A Good Play? (February 2012), I described the short-term turmoil in the solar industry due to overcapacity and falling prices. Why short-term? The overcapacity will inevitably correct itself in view of the expanding global demand for energy, coupled with rapidly falling prices.
Lately, the situation has improved as solar stocks begin a steady climb from their rock bottoms. What’s happened? In November 2012, the Chinese government announced that it would double down its investments in solar. Why is that important? First, Chinese companies now dominate the global solar market. Second, at this time of distress the Chinese government comes to the rescue, in contrast to the US and German governments that watched their major solar firms die. Third, China has a national policy that places top priority on alternative energy because it lacks oil and gas reserves.
At the same time, the US market also received a boost in January when Warren Buffett’s MidAmerican Solar agreed to purchase a big solar farm project from SunPower. The other silent boost comes from the new availability of zero-down financing for installation of solar panels on residential rooftops. With zero initial cost, installing solar by just paying monthly provides a good incentive for overcoming rising electricity and gas bills besides benefitting the environment.
The following summarizes the roller-coaster ride of the share prices of top Chinese solar companies:
Suntech (STP): high $90 (2007), low $0.71 (2012 Dec), high $1.87(2013 Jan).
Yingli (YGE): high $42 (2007), low $1.25 (2012 Dec), high $3.05 (2013 Jan).
JA Solar (JASO): high $135 (2008), low $2.91 (2012 Dec), high $5.96 (2013 Jan). The stock price reflects a reverse split of 5:1 implemented on 12/10/12.
Trina Solar (TSL): high $36 (2007), low $2.04 (2012 Dec), high $5.81(2013 Jan).
From the above, the turnaround of major solar stocks has resulted in more than doubling their prices from mid December 02 to mid January 03. In view of the lofty levels from which they have fallen, this seems the beginning of a long recovery. So far, it has attracted only little attention because people are scared away by the big decline that had lasted for the last few years. Nevertheless, the decline only occurred in the stock prices, not in the global solar market, which is growing fast even during the recession.
In the US, the solar recovery during the same one-month period is even more pronounced, as shown by two top companies:
First Solar (FSLR): high $317 (2008), low $11.43 (2012 Dec), high $35.60 (2013 Jan). SunPower (SPWR): high $107 (2008), low $3.71 (2012 Dec), high $9.12 (2013 Jan).
When stocks turn around and advance steadily for over a month, the bottoms are seen to have been reached. The bottoms are also confirmed by the share holdings of institutional investors. As big players who have representation on the board of directors of public companies, they have insider information about the business whereas the general public only relies on second-hand news. The following shows the percentage shares of institutional investors in the total outstanding shares of the companies selected:
Suntech: 35% (2011 Mar) to 14% (2013 Jan).
Yingli: 52% (2011 Mar) to 12% (2013 Jan).
JA Solar: 45% (2011 Mar) to 1% (2013 Jan).
Trina Solar: 64% (2011 Mar) to 1% (2012 Dec) to 55% (2013 Jan).
First Solar: 75% (2011 Mar) to 76% (2013 Jan).
SunPower: 50% (2011 Mar) to 20% (2013 Jan).
From the above, the flight of institutional investors has greatly depressed the stock prices of those companies. Since Autumn 2012, the institutional flight appears to have ceased. They are poised for coming back from now on. In particular, Trina Solar has already shown a dramatic increase in institutional ownership.
Given a visible turnaround now, will there be a second dip? Maybe, but how big a dip it can be at this bottom level? Since what we know is only second-hand news, we may as well follow the institutional investors. They must buy near the bottoms in order to make themselves bottom-heavy. From these low levels, they will continue to buy more shares to boost the stocks to their target prices. Then they will start to cash out. After the stocks have fallen as a result of their big selling, they will go back in to play the cycle again if the companies are still performing well. They buy and play, whereas we buy and pray.
The scary performance of solar stocks has greatly disappointed countless people. Many solar companies have already fallen, notably Q Cells (Germany), Sharp Solar (Japan) and Solyndra (USA). Some more will collapse even when the market is picking up. At this stage, the least risk is to focus on the surviving top companies in the solar sector, especially the Chinese ones likely to receive government support. I have selected six stocks worth buying near their bottoms, four Chinese and two American. They have a better chance to survive the current industry shakeout because they have amassed the biggest market shares.