Will outsized solar stock returns continue?

By Harris Roen

Any way you slice it, solar investing has been on a tear for the last year. Of the 69 solar stocks that the Roen Financial Report tracks, three quarters are up for the year. On average solar stocks have gained 85% for the year, with 60% of solar companies up in the double digits.What is most impressive is that the top 17 solar stocks are all up in the triple digits, and one, Canadian Solar Inc. (CSIQ), is up 903%! This article will look at who these outsized performers are, what is going on with them, and where this highflying sector may go from here.

Top Solar Companies

Ticker	Company	Market Cap	Location	Product/Service
ALTI	Altair Nanotechnologies, Inc.	micro	Reno, NV	Energy storage
ASYS	Amtech Systems, Inc.	micro	Tempe, AZ	Semiconductor manufacturing equipment
CSIQ	Canadian Solar Inc.	small	Canada	Solar cells and modules
CSUN	China Sunergy Co., Ltd.	micro	China	Crystalline silicon solar cell and modules
DQ	Daqo New Energy Corp.	micro	China	Raw polysilicon, silicon cells and PV modules
FSLR	First Solar, Inc.	small	Tempe, AZ	Thin-cell PV cells and modules
GTAT	GT Advanced Technologies Inc.	micro	Merrimack, NH	Equipment used by solar and LED manufacturers
HSOL	Solarfun Power Holdings Co.	micro	China	Vertically integrated, raw materials to finished product
JASO	JA Solar Holdings Co., Ltd.	small	China	Solar cells, modules and panels
JKS	JinkoSolar Holding Co., Ltd.	micro	China	Solar wafers, cells and modules
RGSE	Real Goods Solar, Inc.	micro	Louisville, CO	Solar installation
SCTY	SolarCity Corp.	micro	San Mateo, CA	Design, installation, financing of residential and commercial solar
SOL	ReneSola Ltd.	small	China	PV manufacturer
SPWR	SunPower Corp.	small	San Jose, CA	PV manufacture and instillation
SUNE	Sunedison Inc.	small	St. Peters, MO	Vertically integrated PV manufacturer; project developer
TSL	Trina Solar Ltd.	small	China	Solar cells and modules
YGE	Yingli Green Energy Hold. Co.	small	China	Integrated solar company

The top returning solar companies, listed above, perform a variety of products and services in the solar sector. Overall they are small companies as measured by market capitalization, and are all either U.S. or Chinese companies (even though CSIQ is headquartered in Canada, virtually all of its operations are in China). Returns for these top solar stocks are outstanding, averaging 302% for the past year.
 

Top Solar Stock Technicals and Fundamentals

What caused these stocks to shoot up over since the beginning of 2013? Part of the story is their stock prices were overly depressed in 2012. Solar stocks experienced a very strong downdraft due to large losses incurred earlier in the decade. As is typical in the stock market investors overshot, so many of these stocks are recovering from exaggerated lows.

 

Technical charting is one thing, but it is more instructive to look at some of the fundamentals. The graph above shows the average return on equity (ROE) for all 17 top solar stocks. ROE is a multiple that reflects how efficiently a company uses its resources to turn a profit. The numbers were dismal from 2009 through 2012, but improved markedly in 2013, led by companies like Real Goods and Trina. The column in 2014 shows ROE for the past 12 months of reported data, so it can be seen that the ROE has weakened. (Because of the wild ROE fluctuation for ReneSola, data for this company was removed for the purposes of this chart.)

 

Debt can also be a useful measure to view how companies in a sector are faring. Debt in and of itself is not a bad thing, it is how debt is deployed that matters. The chart above graphs two measures of debt. The blue line shows a ratio of total liabilities to total assets, which has been continually trending up. (It is interesting to note that the two smallest ratios belong to FSLR and ASYS, American companies, and the two highest, YGE and CSUN, are Chinese.) Though banks (or government in the case of China) seem willing to continue to loan to these companies, a continuing of this up trend would make me cautious.

The black line, long-term debt to total sales, is presenting a nice downtrend. This improvement is due to increasing sales for these companies. There has been a slight uptick in the most recent measure of long-term debt to total sales, so caution is advised here as well.

Average sales for these top solar stocks show a similar story. The figure above charts the average percentage change in sales from the previous quarter for the top solar companies. It is clear that sales improved markedly at the end of 2012 and beginning of 2013. Sales are still growing, but have diminished somewhat from earlier growth levels.
 

Where Do These Top Solar Stocks go From Here?

 

Considering the charts above, it is likely that these top solar stocks will back off on some of their outsized gains. Though there may be some pull back at the top level, I think the long-term trend is still up.

The last chart shows the Ardour Solar Energy Index^SM (SOLRX), illustrating that solar stocks are still way below the heady days of 2007-2008. In fact, despite the recent large gains in solar specifically, and alternative energy companies in general, solar stocks are only trading at levels they were at two and a half years ago. Though it may take decades for solar stocks to get back to the highs of 2008, and some may never get there at all, there is still plenty of room for price recovery.

In sum, the enormous gains in solar in the past year will be hard to maintain, so we expect there to be some pullback from here. Having said that, there is still much room for growth in this sector, owing to attractively low overall install costs, high levels of public interest, and continued incentives. Though a 20+% correction in this sector would not surprise me, I would take it as a good buying opportunity.

DISCLOSURE

Individuals involved with the Roen Financial Report and Swiftwood Press LLC owned or controlled shares of SUNE, TSL. It is also possible that individuals may own or control shares of one or more of the underlying securities contained in the Mutual Funds or Exchange Traded Funds mentioned in this article. Any advice and/or recommendations made in this article are of a general nature and are not to be considered specific investment advice. Individuals should seek advice from their investment professional before making any important financial decisions. See Terms of Use for more information.

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