Solar energy stocks are frustrating investments for many people. They look like a no brainer with low P/Es and a bright future for the industry, but have consistently underperformed. Despite that history, though, there are several reasons that buying stock in high quality companies in the industry right now makes sense, even if it is only for a limited time.
First and foremost, the candidates for the Presidential election are now set, and if the polls so far are to be believed, the election is Hillary Clinton’s to lose. I am not saying that she is incapable of doing just that, but the market will respond to probabilities and, as of right now, Clinton is the overwhelming favorite on the betting sites. It was interesting, then, that in her victory speech the other night there was only one clear policy point. Hidden amongst the talk of the historic nature of the first female candidate and the usual platitudes about the middle class and a bright future was the assertion that America should become a world leader in clean energy.
That is notable because, unlike many policies focused on the economy, energy policy is almost directly under the President’s control. If you doubt that, ask anybody in the coal business how they have done under the current President, even with a Republican Congress opposing every move. If we accept that Hillary is the favorite to win the election and that clean energy will be a priority then investing in the largest and fastest growing non fossil fuel energy source, solar power, is a smart move.
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As mentioned above, though, that growth and potential have been evident for some time, but, as the above 1 year chart for the Guggenheim Global Solar ETF (TAN) shows, that has not stopped stocks in the sector performing poorly. Recoiling from a chart like that is only natural, but consider a couple of things before you run a mile. Firstly that is a global chart and the story now is focused on post election America. Secondly a large part of the reason for that collapse is product pricing.
From a technical perspective, photovoltaic cells and the panels made from them that form a solar array are not commoditized as they are not traded on an open market. In effect, however, as supply has increased to outstrip demand, prices have reacted like a commodity. If market conditions force manufacturers to sell at a loss then stock in those companies is not going to do well and that is what we have seen on a global basis as China ramped up production. As with any commodity, though, there is a limit to how far that can go. Eventually low prices become self curing as producers are forced out of the market and the length and severity of this downturn suggests that point must come soon in the solar industry. The rebound in oil and the surge in natural gas will have helped bring that point even closer.
Even if that doesn’t come soon though, large, profitable North American companies in the industry look set to gain back some ground. Companies like First Solar (FSLR) and Canadian Solar (CSIQ) have remained profitable even as prices have fallen and will benefit from any talk in the election campaign of a continued focus on shifting away from fossil fuels. Even without that, as the closure of four more coal fired power plants this week by DTE Energy shows, existing regulations continue to push utilities towards solar, wind and natural gas.
Both FSLR and CSIQ are available at bargain prices, which is hardly surprising given the history of investing in the industry. Even if you have been burned in the past by exposure to the sun, however, this summer may well prove to be a good chance to recover some of that as election rhetoric and increasing product prices combine to give solar stocks a boost.