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Martin Tillier

Martin Tillier

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The Best Play In Solar Right Now

By now, most of us have a view on solar power. You may believe it is the future of energy; that harnessing the very energy that gives us life, that the universe gives us for free, is the logical future when traditional fossil fuels are both finite and damaging to the environment. On the other hand, you may believe that it is all a pipe dream; that if solar energy can ever become an economically viable source for a significant part of the world’s energy needs those days are so far off as to be irrelevant to you, and that any industry dependent upon government subsidy is doomed to failure. If you are inclined to the second view, however, recent events suggest that you may have to think again.

Jim Hughes, the CEO of First Solar (FSLR), speaking at the Edison Electric Institute meeting in New Orleans, referred to the expiration of tax credits here in the U.S. as “irrelevant”. He went on to forecast that the cost of electricity production from solar power would have fallen to under $1 per Watt by the beginning of 2017. Costs are falling exponentially, and the days of competitive renewable energy are, according to the industry, very close.

Most people think of individual rooftop arrays or maybe a farm giving up some arable production to “plant” solar panels when they think of solar power, but according to Hughes it is utility projects that are driving current progress in the industry. Projects on that scale accelerate progress towards cheaper production and maintenance overall, leaving us most likely to be only a few years from solar being truly competitive with fossil fuels. At that point the difference in externalities makes solar an obvious choice and the massive potential in the business will finally be fulfilled. Related: Fossil Fuel Divestment Could Be A Red Herring

I am inclined to agree that at some point before too long that situation will be upon us, but I cannot escape a feeling of déjà vu when I hear that the dominance of any renewable energy source is imminent. Despite my cynicism, however, I can also see that, from a trader’s perspective, whether or not we are actually in the middle of a breakthrough right now is not the point. If enough people believe that we are, and if one does come eventually, then stock in the industry’s major players is set to jump significantly, both in the short term and in the very long term.

It is for that reason that I am always on the lookout for a setup to buy solar stocks with limited risk and a reasonable chance of a pop in the short term. If that pop comes, then taking profit on most of the position leaves you with a small residual position with an extremely low average cost base; something that you can salt away for the long term. Hughes’s FSLR, is a company that has been operating profitably in the business for a long time and is a likely long term survivor, so when that stock sets up, as it has this week, for a trade with a minimal downside, smart investors should pay attention. Related: Why The Oil Rally May Well Be Over


(Click to enlarge)

At the time of writing, FSLR is trading at around $51, having bounced off of a triple bottom formed at around $49. A stop set on a clean break of that level, say at $48.50, makes buying FSLR here a trade with a 4.9 percent downside. To the upside you would be looking for a return to the $65 level, at which point you would look to sell around 75 percent of the original position, leaving you with a small holding with a $9 average cost basis that can be effectively ran forever. Related:Expect A Wave Of Consolidation In The Oil Industry

On balance, even allowing for some degree of “talking your book” by those in the solar industry, it does seem as if the days of truly competitive solar power are not that far off. Even if you disagree though, and have no intention of establishing a long term holding in a solar company, a setup such as this offers the potential for significant short term profit with controlled risk. Those are situations I was trained to look for and take advantage of, whatever my view of the industry or market they were in.

By Martin Tillier of Oilprice.com

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