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US Energy Bill: Solar Stocks Will Feel All the Heat

by: Smart Guy Stocks December 16, 2007 | about stocks: AKNS / AMAT / CSIQ / ESLR / FSLR / JASO / LDK / SOLF / SPWRA / STP / WFR / YGE    
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Last week, US lawmakers destroyed US chances for energy independence by renewing tax subsidies for oil companies at the expense of supporting a strong domestic industry for clean energy. As noted in Friday’s Wall Street Journal, “Overall, the big winner in the endgame that produced final passage of the bill … was major oil companies.” This haphazard move should have the Middle East and Venezuela cheering because it will drastically weaken US competitors who are seeking to become global super powers of solar, wind, biomass, and other forms of renewable energy.

At the moment, most clean energy technologies are in early adopter stages. As a result, products are relatively expensive when compared to mature energy inputs such as oil, coal, and natural gas. Although these fossil fuels have been heavily subsidized by tax payer dollars (i.e., receiving welfare) since WWII, the oil lobby has done an excellent job filling the mainstream media with barrels of spin to make the average citizen believe ethanol and solar are the big welfare enemies. The lobbying and PR worked because the oil industry has emerged with tax subsidies that common sense would have redirected toward the renewable energy credits. Apparently, the oil industry is more important than preventing terrorism and creating strong domestic industries.

Politics and safety aside, the new US Energy Bill leaves high-flying solar stocks in a very precarious position. Renewable energy credits are a critical component to the business models of solar companies. Without such credits, all of these companies will see margins shrink, and some of these companies will not be able to make their products cost competitive. Thus, I am placing the solar industry on the SGS watch list for opportunities to short stocks and play put options.

I was completely bewildered on Friday when solar stocks failed to react like Barry Cinnamon, president of Akeena Solar Inc. (AKNS), who said U.S. companies trying to compete internationally in solar “won’t continue to grow as quickly as they could have.” Cinnamon and other executives are announcing to the world that their growth will suffer, yet Piper Jaffrey suspiciously upgraded the sector on Friday and had ignorant speculators pushing solar stocks much higher. Given the industry is trading as irrationally as tech stocks during the dotcom bubble, I recommend waiting for reality to set in before attempting any bearish plays.

In recent years a ton of socially responsible investment [SRI] funds have burst on the scene to capitalize on the green movement. Thus a ton of hot money is chasing a relatively small universe of stocks. As these funds have put money to work to take advantage of the media frenzy surrounding climate change, sexy solar stocks have soared like Icarus (and we all know what happened to him). Moreover, newbie fund managers who are trying to capitalize like their predecessors during the tech bubble may continue to buy sell-side analyst calls because these inexperienced managers are not skilled enough to do otherwise. Consequently, we may see more irrational highs before these stocks revalue to account for the new US Energy Bill.

In addition to AKNS, JA Solar (JASO), Yingli Green Energy (YGE), Suntech Power (STP), Solarfun Power (SOLF), Sunpower Corp (SPWR), First Solar (FSLR), Evergreen Solar (ESLR), LDK Solar (LDK), Canadian Solar (CSIQ), MEMC (WFR), and Applied Materials (AMAT) will all feel the heat. Those with higher domestic exposure will get burned worst. On November 12, all of these stocks sold off on reports that the renewable energy credits would be left out of the bill, but for some reason people were less concerned now that this negative rumor has become harsh reality.

Skeptics will say we have another year to renew the renewable energy credits, but realists don’t bet on Washington getting anything done in an election year. Further, the renewable energy credits were left to expire last time before being renewed retroactively. If we have a repeat performance in 2009 or 2010, as Cinnamon noted in the WSJ, this lack of visibility will still stall investment in solar.

The stage is now set for a possible bursting of the solar bubble… but we need to wait until the bag holders realize they are fully exposed to the high noon sun.

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This article has 12 comments:

  •  
    Dec 17 09:49 AM
    Even your title is wrong. The US economy is what will feel the heat. If the US does not want to take its head out of Butte Montana and realize that the global energy market is undergoing a serious tranformation, then the US will go the way of the DODO. Plain and simple. US needs to flush its worthless congress down the toilet. And that is a fact! Do I sound like Chinese? lol. Seriously though if you think the solar bubble is going to burst then you have no understanding of the global energy market. The only way the solar bubble will burst is if the entire global economy collapses. In which case the price of oil will crash and solar will thus be rendered moot. But if that happens then what would it matter anyway?>
    Reply
  •  
    Dec 17 10:07 AM
    I guess you don't understand what happens to a company with a PE of 190 when there's a kink in the growth. Millions of people like you said tech stocks could never fall because the internet was the future. But I am sure that you know better than the CEO's who are all warning that this bill will hurt their companies.

    Side notes for your future research: which country is the largest consumer of energy? What happens to industries when their largest customer base slows?
    Reply
  •  
    Dec 17 02:26 PM
    The author is a fool! The solution is to encourage more oil exploration and development. Open up off shore drilling, as well as Federal lands.
    Reply
  •  
    Dec 17 02:33 PM
    That's a great idea! Let's keep our infrastructure dependent on oil (which we can NEVER meet our demand internally) and keep letting the Middle East make a fortune so they can buy our companies with their sovereign investment funds.

    Let's start drilling everywhere. Even the great National Parks. Who needs anything besides big oil drilling operations?

    If we use our geniuses and business savvy to dominate a renewable energy industry, we will end up a much stronger nation than one that keeps chasing dying markets.
    Reply
  •  
    Dec 17 04:10 PM
    The solar industry has boomed without any significant sales to the US and can continue to do so. The European target of 20% of electricity from renewable sources by 2020 is enough to stimulate demand in Spain, Italy, France and Germany for all the industry's output for the next few years. After that the cost should of fallen so that tax credits are not needed.
    Reply
  •  
    Dec 17 05:42 PM
    I agree that international renewable energy growth has been the key driver for solar. HOWEVER, analysts and speculators have priced valuations on STRONG US demand going forward. Thus, as I noted above, PE ratios of 200 and higher are absurd.
    Reply
  •  
    Dec 17 07:02 PM
    To mixter:

    All the capped wells we have now could supply the US with oil for the next 200 years. This is taking into account the increased need for energy. The oil shortage is a total scam. We don't need to explore ... we already have the oil.
    Reply
  •  
    Dec 17 07:06 PM
    Iconoclast

    When you were mentioning the worthless Congress, you forgot to mention criminal, corrupt, and traitorous.

    I will refrain from mentioning the Executive and Judicial branches for lack of space.

    Founding Fathers must be spinning in their graves at least 10,000 RPM by now.
    Reply
  •  
    Dec 17 10:08 PM
    Take notice of how bad the solar stocks sold off today on much higher volume than yesterday's pop. These are all signs from a lesson taught during the dotcom bubble.

    I find it interesting that this article has brought the most criticism although I did not recommend shorting the stocks, ONLY watching them because the US Energy Bill will hurt them. I think this is evidence that people are in super greed mode and can only see the prospects of solar one day displacing fossil fuel. And I do agree that solar holds much promise, but the key is whether it will be Solar 2.0, 3.0, or later that will truly deliver upon our sci-fi visions.

    Caveat: I am a trader. From that standpoint, I have not problem buying USO or FSLR. So, if greed keeps pushing solar higher, I will simply wait. I do not care one way or the other. If you want to see my performance, simply take a look at smartguystocks.com. I also work in the energy sector. I am not talking out of the place where the sun don't shine ...
    Reply
  •  
    Dec 18 12:31 AM
    This piece is quite accurate. The solars will all get pounded but not before the "blow off top" which I would bet is what we are seeing here.

    The irony is that what is left of the solar industry will be much stronger and be able to carry us to where we need to be. Of course much pain and lamenting until then. Ultimately the solar (surviving) companies will by then have learned how to function without subsidies which is in fact the real reason the solar industry has not been able to deliver a true consumer product. Subsidies are just like crack cocaine to this industry and breaking the addiction will be ugly. We are about to see it.

    You don't recommend shorting any of these names but I sure as hell will. I know this industry very well and some serious shorting is in order to reel some of these cowboys in. Hint: Solar companies are not necessarily your friend...

    And to Iconoclast421. You seriously have no idea how this industry works. It is clearly evident in your myopic, acerbic and distorted view of the solar industry viewed through the lens of the incredible (nearly Disney like proportions) projections on how this industry has 200 years of backlog and 3,000% yoy growth. It simply isn't true. When people like you are forced to deal with the economic realities of the solar industry, it is a quick and unintelligent leap over to the "if only George Bush were able to pull his ass out of the Bible and put down that liquor bottle. But not before he calls his Middle Eastern buddies to sell of a big chunk of America" preposterous camp.

    Good piece. It is great to know others see the forest for the trees.

    Signed, many year solar industry veteran.
    Reply
  •  
    Dec 21 09:22 AM
    Buffettz has the only statement on this page (the author's article included) that has a solid basis in fact. Because of the on-again off-again history of the U.S.'s pathetic subsidies for oil alternatives, no one has invested serious money based on them for decades. The two main U.S. solars, SPWR and FSLR, have not relied significantly on anything provided by the U.S. government. (California, yes, a bit - but no one is talking about CA cutting back). The other important solar - STP - also does not rely on the U.S. market.

    Short away, if you want: it will be fun watching you try to cover as the U.S. economy goes into recession, and the only U.S. companies continuing to grow are those - like FSLR and SPWR - that are in a growing sector and selling primarily overseas.
    Reply
  •  
    Dec 25 07:42 PM
    someone on yahoo by name of gungbao2003

    It has been claimed and I quote from Bill Alpert's Barrons' Article:
    "What dismayed investors were September-quarter gross margins of 30.8% -- down from 35% in June and 39% in 2006. Piper Jaffray's Jesse Pichel noted that LDK gross margins were still an inexplicable 10 percentage points above those of peer ReneSola (SOLA). LDK inventory is turning just 2.2 times a year. Pichel downgraded the shares to a Sell with a price target of 34.50."

    In summary the answers to why RENESOLA's margins are 10% points lower than LDK are found in RENESOLA's press releases and financial statements. The difference is in the technology. Majority of RENESOLA's solar wafers produced up to 3rd Qtr of 2007 are monocrystalline wafers while LDK's are MULTIcrystalline wafers. Why would this difference account for LDK's margin's being better?

    First, RENESOLA in their IPO papers stated and I quote from
    buchanan.uk.com/cgi-bi......
    "In early 2007, the Directors intend to commence the installation of 15 multicrystalline furnaces, which each have a capacity in excess of 2,400 kg per month. Multicrystalline furnaces are more energy efficient than monocrystalline furnaces and require a lower grade of polysilicon which would improve the yield from ReneSola's raw materials."

    What happened since then? Did RENESOLA achieve full capacity production yet on cheaper and more efficient Multi-crystalline solar wafer production? The answers are in RENESOLA's 3rd quarter ER. renesola.com/investorR......

    "ReneSola commenced the installation of multicrystalline furnaces in September following the delivery of the coated crucibles. 15 multicrystalline furnaces, with a combined manufacturing capacity of 75 MW, have now been delivered and installed and are in initial production. The remaining 17 furnaces will be delivered and installed, as planned, by the end of 2007."

    If you use your brains, then you would see that majority of RENESOLA's products were still made using the less efficient mono-crystalline methods and they are just going on-stream with Multi-crystalline production in 4th Qtr of 2007. RENESOLA is just playing catch up to LDK and are aware their margins are lower hence their decision to switch to the more efficient production of multicrystalline wafers.

    Reply
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