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Solar-Stock Rally Assumes Too Much

The speculative runup in the sector is defective in logic


If you had to, you could call it a silver lining. The more dire the nuclear situation seemed to get in Japan, the more the stocks of solar manufacturers seemed to rally.

The logic seems to be that solar is a readymade alternative to petroleum that is far less risky than nuclear power. Japan, which has relied for decades on nuclear energy in order to wean itself off a dependence on foreign oil, will be looking for a new energy resource after the quake-damaged nuclear plants began spewing radiation.

First Solar (NASDAQ:FSLR), which traded at almost $140 before the quake struck, jumped more than 12% in two days before easing back as fears of a meltdown in Japan modestly abated. Suntech Power (NYSE:STP) and SunPower (NASDAQ:SPWRA) also have put up respectable gains since March 11, while Trina Solar (NYSE:TSL) and LDK (NYSE:LDK) have performed even better.

As tempting as it is to imagine that investors are lining up to contribute money to solar companies that can provide Japan with a safer means of energy, it’s much more likely that the motivations are more ghoulish — a heady rush to capitalize on disaster and misfortune.
Well, that’s the financial markets.

But the thing is, if you look at this rally from the cold logic that prudent investing demands, it doesn’t add up. First of all, as some analysts have pointed out, the quake and its aftermath is potentially a short-term negative for some solar companies, particularly for those with operations in Japan.

According to Credit Suisse, Suntech Power and SunPower own manufacturing plants or have contracted with companies with facilities in Japan, and it’s not clear how those facilities have been affected by the quake or the disruption to Japan’s energy grid.

In addition, while demand in Japan for solar panels may be higher over the next several years, it may be some time before it actually picks up. Companies will take a hit on revenue this year because of the quake, and may be more tightfisted with capital expenses. The Japanese government, already saddled with debt equal to 196% of its GDP, has a lot of rebuilding to do. If solar becomes a priority, it may take some time.

What’s more, First Solar isn’t likely to benefit from any new push to invest in solar energy in Japan. The country has shown a strong preference for more efficient silicon as well as and thin-film panels that don’t use First Solar’s technology. With production of these panels rising, and prices falling, that’s unlikely to change. Yet First Solar’s stock has been rising anyway.

The solar rally also seems to assume that Japan is the only market worth considering. But subsidies are still in question in Europe. Just last week, Energy Conversion Devices has fallen 30% since it said that policy changes in Italy and France, as the company put it, “forced us to reconsider our near-term financial outlook.”

Beware the post-quake rally in solar stocks. It’s speculative in the worst sense of the word – not only is it cold-blooded in spirit, it’s defective in logic.

Article printed from InvestorPlace Media,

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