One of the most basic things that those new to the world of trading have to understand is that markets overreact to news. Traders are essentially herd animals, and once momentum builds in any direction it can be hard to reverse and as a result usually overshoots the logical mark. That is almost certainly the case now with solar stocks in the U.S. market.
Don’t get me wrong, I don’t think that the election of Trump is a good thing for alternative energy. The candidate Trump made it clear in his campaign that his administration would be focused on conventional, fossil fuel energy. Policies such as opening up Federal lands for drilling and expanding energy infrastructure will help oil companies, and the logical assumption is that there will be no extension of subsidies and tax credits designed to encourage a shift to renewable energy. That was why I wrote in my immediate take on post election investing that solar stocks would suffer. A week and a half, however, is a long time in investing.
In that week and a half the broad market has surprised many people by soaring following the election, but the response in the energy sector was, initially at least, exactly what one would expect. Big oil companies and energy infrastructure companies such as CVX and KMI soared in the few days immediately after the results, while the big solar names such as FSLR took a dive. Over the last few days, though, the rally in the oil sector has stalled, while the rout of solar stocks and in FSLR in particular, has continued.
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With that stock now at multi year lows it is worth taking some time to step back and see if that exaggerated move is really justified or if this is a case of the market overshooting logic.
The facts in this case point to the latter conclusion. First and foremost, FSLR is not some speculative stock that has value based on the hope that someday, with enough help from subsidies, they will make a profit. They have been making money for around five years now. Admittedly the tax breaks that are offered for solar power have helped, but they were extended through 2023 by a Republican Congress in 2015, and Trump has not specifically said that he will end them. It is fair to believe that there is a chance of that given his overall view of energy policy, but FSLR is being sold off as if it was a done deal, and the stock should at some point reflect the uncertainty.
Once again, I should make…