Both investment banks — along with analysts at Axiom Capital — call out China as the main reason for the sell warnings. The group estimates that Chinese demand will actually fall flat of consensus estimates of 14 GW installed in 2014. That should clip earnings during the second half of the year for solar stocks that strictly make panels or panel parts.
Axiom sees another worry in that polysilicon prices are currently listed below cost of production prices. That’ll boost revenues, but devastate profits at the panel makers. Essentially, we’ll be back to the same scenario we had in 2011 and 2012. And remember what happens to firms that are all revenue, no profit….
Then there is the continuing anti-dumping and trade problems facing the sector. While the U.S. and China seemed to have come to an agreement, Europe is battling it out with Asia’s Dragon economy. Meanwhile, India has launched anti-dumping sanctions against China and the U.S. solar producers.
Add in dwindling subsidy rates in key sector drivers like Japan and the United States, plus ultra-cheap natural gas/LNG that solar now must compete with and you have a few major storm clouds brewing in the horizon.
Rainy Days for Solar Stocks
For investors, solar stocks seem to whipsaw on any bit of good or bad news. TSL jumped 31% of its earnings beat, only to fall by the wayside over the next few days. Given just how quickly they move from profits to losses, quarter-to-quarter doesn’t necessarily place them firmly in the “investment” camp.
To that end, the best way to play solar stocks is still the previously mentioned TAN ETF or its rival Market Vectors Solar Energy ETF (KWT). Both offer a broad way to play the entire solar spectrum. And given just how varied the earnings and guidance reports have been, that’s probably the best choice for investors at this point. The good should even out the bad.
The bottom line: Don’t get too excited over the recent gains in solar stock world; there still could be plenty of clouds ahead. A variety of factors will continue to pull the sector in both directions.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.