Wednesday, December 31, 2008

Solar Stocks: Short Side Profits

With the imminent inauguration of a Green President, solar stocks may appear to be a bargain, but investors seeking to profit from their support of Green should consider the various issues and concerns that effect solar stock valuation.

Alongside price, one of the most important considerations with solar panels is their efficiency ratio, (a measure of how well solar cells convert light energy into electric power). We have seen advances on both fronts and for some this has led to meteoric growth (ie: FSLR's 700% increase), however the news for solar is not entirely sunny.

A difficult economy and the low cost of crude have weakened the price of solar stocks, in December the beleaguered auto industry and the Madoff scandal increased the downward pressure. A growing number of solar companies, including Q-Cells in Germany, have recently cut production and sales outlook. And concerns about oversupply in an economic downturn are legitimate particularly for firms like FSLR that trade in Europe. Sovello (a new joint venture of Q-Cells, Renewable Energy Corp, and Evergreen Solar), had been anticipating a spring 2009 public offering, but has decided to wait until the market stabilizes.

Accross the board, the solar sector has been experiencing price declines. According to an AP ONLINE article posted on December 15 of this year, shares of solar companies continue to fall "due to a continued over supply and macroeconomic headwinds."

Lazard Capital Markets analyst Sanjay Shrestha reduced his price targets on several solar companies citing "worsening industry turbulence and accelarating price declines." He said "while companies with strong liquidity will slow production until the market stabilizes, companies in need of cash will likely flood the market with their product, reinforcing the downward spiral in pricing." Shrestha added that "price declines have even reached some high-quality cell manufacturers." However, the analyst also added that the President elect's focus on renewable energy could "brighten the solar sector and provide near-term trading opportunities for investors."

According to an article in Forbes earlier this month, "investors remain heavily bullish toward the alternative energy sector. [D]ata from the International Securities Exchange (ISE) and the Chicago Board Options Exchange (CBOE) reveals that this bullish sentiment could be far from fading. [However], this rising optimism on a sector locked in a technical downtrend has bearish implications from a contrarian perspective." Falling oil prices and bearish fears have driven down the price of solar shares, but the same article concedes that you can profit on the short side, and some of us already have.

Next: My Solar Stock Picks: Timing and Strategy

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