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A Strategy Shift And A Buying Opportunity In Solar

Two pieces of news this week sent contradictory signals for solar power and resulted in a bit of a crazy week for investors in that industry. Now that the initial reactions have died down, however, the long and short-term trends that the stories indicate suggest a change of strategy in solar stocks may be warranted.

First, the Institute for Energy Economics and Financial Analysis (IEEFA) issued a report that stated that April was projected to be, in their words “momentous”, as renewable energy looked set to surpass coal in U.S. electricity generation for the first time ever. Then, just as investors were digesting and reacting to that, word came from the U.S. trade delegation that a particular type of solar panel had been removed from the tariff list, an action that prompted a big drop in the major U.S. solar companies.

Bifacial solar panels are, as you might have deduced from the name, panels that produce power from both sides. That enables them to generate electricity from reflected as well as direct sunlight and as a result, increase the efficiency of a solar array in terms of the area of land needed. The technology if relatively new so they are not yet a big part of the industry, but most analysts see them as becoming increasingly dominant in new solar arrays built by utilities.

Chinese companies are the main producers of bifacial panels and, until this week, they were subject to a 25% import duty as part of the broader tariffs on that country. On the surface, that sounds like a good thing for U.S. panel manufacturers, and solar stocks have shown good recent gains on that basis. As is usually the case with tariffs, however, that is an overly simplistic view.

The industry group that represents the installers of solar panels has been pointing out that it hurts them and will ultimately hurt the very companies it protects in the short term. You cannot undo technological advances and utility companies, faced with what they will undoubtedly view as a temporary obstruction to using the most efficient technology available, will presumably put some projects on hold. The White House presumably agreed as they were removed from the list of goods subject to the tax.

When that became known on Wednesday, stock in the two biggest U.S. solar companies, First Solar (FSLR) and SunPower (SPWR), dropped dramatically.

Mart 1

Mart 2

I guess in some ways that makes sense, but this decision will not affect both companies equally.

Until now, First Solar has been my pick in the industry, but that is largely based on their focus on the utility side of the business, rather than domestic panels. This news, however, changes the picture and hands a competitive advantage to SunPower, who have essentially the opposite strategy.

At the very least, opening up the bifacial panel market will have a very limited effect on their business, which brings us back to the first piece of news regarding generalized growth in alternative energy. Obviously, most of that solar part of that growth comes from utility-scale generation but even as subsidies are being reduced and rule-changes in some places make it less profitable for homeowners, rooftop panels are still popular.

From a trading and investing perspective therefore, the opportunity from this week’s gyration is in SPWR. The drop in the stock looks like a knee-jerk reaction, and as the long-term dynamic reasserts itself, the stock has a good chance of recovering its losses and pushing back towards the $16 level of three years ago.

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