Investing in solar technology isn’t going to make you rich, but trading the stocks might.
There’s a reason that solar power makes up less than one percent of all energy produced in the US. The technology of solar panels is such that physics limits what it can ultimately accomplish.
For starters, it doesn’t really save energy. The energy expended by diesel-fueled machines to dig the silicon out of the ground, to melt the silicon into a form usable for solar panels, and the energy needed to create the panels more than wipes out any potential savings once the panels start to operate.
The solar cells themselves immediately begin to degrade when exposed to UV light, which they always are, so their efficiency immediately degrades upon first exposure.
Consequently, while the technology is slowly improving, the idea of investing in a solar stock is a really bad idea.
That, however, hasn’t stopped the “true believers” from buying up solar stocks. I think the entire sector should be shorted long-term. The problem with momentum stocks is that there’s no telling how high they can run or, if they fall, how much they may bounce.
Here’s a rundown of how I’d play certain solar stocks.
First Solar (NASDAQ:FSLR) has the largest market cap in the sector at $5.62 billion. It’s the most successful company thus far. It appears, despite massive writedowns every year for one reason or another, to generate about $100 million in profit. It generates a lot of capex each year to keep up with competitors. Why a company that makes $100MM per year is trading at 56x net income, however, is what you should be asking if you are long. It also has $800+ million in cash and only $133 million in debt, so it doesn’t appear to be going under.
SolarCity Corporation (NASDAQ:SCTY) isn’t far behind, with a $5.22 billion market cap. This valuation is granted despite having operational losses as far back as I can see, and they appear to be increasing. SolarCity has $429 million in cash and $680 million in debt. It’s about 33% off its 52 week high, but I don’t see how this company can be trading with the same market cap as FSLR, yet have losses.
This is a great short, if you ask me. Just use a tight stop.
Daqo New Energy Corporation (NYSE:DQ) actually started out profitable in 2010, and has since been losing that profit, ending with a $200 million operating loss in FY13. The company has a $300 million market cap. Moreover, it is based in China, so you have the potential for all kinds of fraud. This smells like another short.
JinkoSolar Holding Co., Ltd (NYSE:JKS) is another China-based company. It saw a $126 million profit in FY10, which was cut by two-thirds in FY11, which became a quarter-billion dollar loss in FY12, and managed a $31 million profit last year. Free cash flow ebbs and flows.
And yet, the company has a $712 million market cap. This makes no sense to me. It’s 40% off its high and I think there’s more downside.
Lawrence Meyers does not have a position in any company mentioned.
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