Investor's Business Daily
Some Solar Stocks Expected To Remain Hot
Wednesday January 2, 6:07 pm ET
Brian Womack
Many solar company shares shot skyward in 2007, making them among the hottest stocks .
IBD's Energy-Other group, heavy with solar companies, currently ranks No. 1 of the 197 industry groups tracked. The 75-company group is up 70% since mid-August. Rankings are based on stocks' price performance in the last six months.
All nine of the top-rated companies in the group are solar-related, and IBD gives all of them a Relative Strength Rating of 99, the highest possible. The RS is based on price performance in the past 12 months.
"The solar sector has done extremely well," said Brion Tanous, an analyst with Merriman Curhan Ford. "It's seeing tremendous growth."
Analysts question whether the group can keep up this pace in 2008. There's much room for growth, but solar companies must continue to depend on government incentives. Old energy sources are still cheaper.
Stock prices have been volatile. It's not uncommon to see stocks in this sector surge, or fall, by 10% or more in one day.
Solar-product makers First Solar (NasdaqGS:FSLR - News), SunPower (NasdaqGS:SPWR - News) and Suntech Power Holdings (NYSE:STP - News) have emerged as sector heavyweights. All have U.S. market capitalizations that top $10 billion. That's more than such household names as bookseller Barnes & Noble (NYSE:BKS - News) and battery maker Energizer Holdings (NYSE:ENR - News).
The high valuations have helped attract mutual funds and other institutional buyers to the solar game in the past three to six months, analysts say. Many funds only invest when companies hit market caps of $5 billion or $10 billion and daily trading volume of 1 million or more.
Besides, many solar companies are in the black and growing earnings.
Solar stocks also enjoy the unique position of being a pure-play investment for clean-energy companies in the U.S. Unlike Europe, wind energy and other green investments are harder to find on the U.S. markets. General Electric (NYSE:GE - News), for example, is one of the largest makers of wind turbines, but that unit makes up less than 15% of GE's total sales.
"There are more investment dollars ... chasing clean energy," said Michael Carboy, an analyst with Signal Hill Capital. "Green energy and cleantech really is an enduring investment theme."
Photovoltaic solar products take the energy of the sun and convert it into electricity. Groups from homeowners to utilities use the technology. Solar industry sales are expected to jump to $69.3 billion in 2016 from $15.6 billion in 2006, says analyst Tanous.
The industry is scrambling to improve its technologies so that it can cut its power costs by half by early next decade. That would put it near the price of traditional electricity and free it from the need for government incentives.
In the meantime, solar demand is strong in many places, especially where incentives have been heavy, including Germany and Spain. Italy, Greece and parts of Asia also have been stoking demand.
The U.S. expansion has been led by California's aggressive solar program. Additionally, the federal government has been giving some tax credits to solar projects. The tax credits run out at the end of 2008, but Congress might extend them.
Rhone Resch, president of the Solar Energy Industries Association, says solar energy's installed capacity rose by 70% in 2007 in the U.S. He sees it rising another 50% to 80% in 2008.
"2007 was really the year of solar energy in the United States," Resch said.
Still, the prospect of government incentives beyond the near term is iffy, says Colin Rusch, an analyst at Broadpoint 19ecurities.
"To predict the market past 18 months is very difficult," he said.
One thing is certain: The industry is facing shortages of the key material used to make solar cells, a type of silicon called polysilicon. Some analysts don't see the shortage working itself out until 2009 or later.
Polysilicon prices have risen to around $400 per kilogram from roughly $35 per kilogram earlier this decade, says Mark Bachman, an analyst at Pacific Crest Securities. He says prices should fall to less than $100 at some point.
The situation has companies working to land long-term supply contracts, analysts say. Companies with close ties to suppliers, such as JA Solar (NasdaqGM:JASO - News) and Yingli Green Energy Holding (NYSE:YGE - News), have seen big stock moves because they might be able to ramp up production faster than others.
The supply shortage has helped suppliers of the material, including investor favorite MEMC Electronic Materials (NYSE:WFR - News). Its stock more than doubled in 2007.
Some companies say investors should look beyond any possible supply shortages. First Solar, which saw its stock rise by more than 700% in 2007, has gained attention by avoiding the shortages. The company uses little or no silicon to make its cells.
First Solar has also managed to ramp up production faster than expected -- and is finding new ways to improve the efficiency of its solar technology.
"They had a lot of things go right for them this year," Rusch said. "They were able to get efficiency gains."
Another favorite is SunPower.
It uses less polysilicon than others, according to analysts. It also boasts some of the most efficient solar cells in the industry -- meaning it gets the most electricity from its solar cells.
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