Solar Investing Rules, Summary:
#1. The lowest-cost producers will get most of the available profits in this commodity industry.
#2. It's a cyclical industry, with high capital costs. Therefore, it isn't safe to buy the stocks, until expectations have bottomed, module prices have fallen to the vicinity of manufacturing costs, and external financing is unavailable for any capacity additions.
#3. After the IPO stage, a viable business plan must include internal funding of capex.
#4. Until one technology is clearly superior, it is best to reduce risk by investing in the best company in each technology.
#5. Higher barriers to entry are needed, or else nobody in solar will be able to maintain decent margins or consistent profit growth.
#6. Vertical integration, from polysilicon through installing systems, is necessary for success in solar.
#7. National Champions will be among the survivors.
#8. No solar company deserves a PE over 15 (using GAAP TTM EPS).
#6-8 are tentative. This is a work in progress. The rules are in order of importance. Next step is to decide which companies meet the criteria. I might decide, after this learning process, that I'm not smart enough to pick the winners. In that case, I'll buy TAN rather than individual companies.
I might also decide this industry is still too immature for any sustainable profit growth, or that no company clearly meets all my investing criteria. In that case, I may do nothing for a year or two, and then look again at the industry. |
