Unless you’ve been living in a cave, you probably know that oil prices have crashed to below $50. Understandably, a lot of investors have shorted oil stocks, oil service stocks, and even oil futures.
That leads to another opportunity. Part of the alleged allure of alternative energy is that it is less expensive than fossil fuels, as far as consumer usage is concerned. If oil prices remain this low, however, then the savings from alternative energy like solar stocks will not be as pronounced.
Thus, if you’re thinking of investing in the solar stocks sector, you may want to think twice. The calculation of cost has taken on a whole new dimension since oil is now less expensive. That means that solar companies may see less business going forward.
Readers of my column know that I think solar stocks are a terrible investment. The underlying economics aren’t good and the companies have a tendency to run high levels of negative free cash flow, making them unsustainable businesses.
However, like all momentum sectors, there’s often a disconnect between reality and how the market prices a stock.
But with such an obvious macroeconomic factor now at play, is it time to short solar stocks?
The easy money has been made, but there may be more downside to come. Let’s examine your options.
The first is to short one of the two solar ETFs. There’s Guggenheim Solar ETF (NYSEARCA:TAN) and Market Vectors Solar Energy (ETF) (NYSEARCA:KWT). TAN and KWT are basically identical as far as major holdings, with the same names appearing in the top 10, with but a few exceptions. The top 10 holdings of TAN account for 62% of assets, and 58% for KWT. Both are down about 20% in the last 12 months.
Because of the high concentration of holding in the top 10, it’s a very efficient way to short the sector.
On the other hand, you may want to go for a strategy of shorting the one or two solar stocks names in the sector that are in trouble.
SunEdison Inc (NYSE:SUNE) is in the hurt box. It loses lots of money every year. Net losses, backing out non-recurring charges, were $420 million, $223 million, and $560 million from 2011 to 2013, respectively. It lost more than $800 million in the first nine months of fiscal year 2014. Not surprisingly, free cash flow was equally miserable — negative $1.8 billion in the first nine months of 2014.
SUNE stock has $1.2 billion in cash, $5.2 billion in debt … and yet despite this and the miserable numbers, it was able to borrow another $350 million to purchase another company.
Would someone explain why this company can even trade at $19? Why isn’t it at zero?
That’s the thing about solar, though. It has its share of true believers who have bid up stocks it the sector to valuations that are insane, and refuse to throw in the towel when things are clearly a disaster.
I think you short SunEdison here. The cash it has will only last another 24 months at the rate it is burning those greenbacks (likely to keep the house warm).
As of this writing, Lawrence Meyers does not hold a position in any of the aforementioned securities.
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