The problem with a big, ongoing news story like crashing energy prices is that we lose perspective on how other sectors will fare in these new conditions.Specifically, renewable energy is not a great sector when oil and natural gas are cheap, which spells hard times for stocks like First Solar, Inc. (FSLR), Sunpower Corporation (SPWR) and SolarCity Corp (SCTY).
The one important thing to bear in mind when investing in the renewables sector is this isn’t a traditional energy sector — it’s a tech sector. Photovoltaic panels are made of silicon, the same stuff that makes computer chips. It’s all about tech. And these stocks trade like tech stocks — big valuations based on projected sales, big plans and hopeful growth.
And the same can be said in the defense sector. There’s the big firms that are vertically integrated and can take on big projects. Then there are the scrambling hopeful subcontractors that do one thing very well, and many of those are tech firms that have chosen to hitch their wagons to government money instead of private sector clients.
Let’s explore how some of these tech losers are going to have a very tough 2015 and beyond.
Cheap Oil, Cheaper Solar Stocks
Simple reality: There’s much more interest on an industrial level and consumer level in renewables when oil and natural gas are expensive and supply is limited. When people are paying $100 a week to gas up their cars (or, from a company’s perspective its fleets of cars and trucks) saving 40% on that weekly bill is a windfall.
Now, if you’re a contrarian, you know that these prices will regress to the mean, and while we may not $100 a barrel oil or $6 a mm/btu for natural gas in the next nine months, it will certainly return.
But as investors, the fact is, low prices will be here for at least six months or more and since the market is forward-looking, it means renewables stocks will be getting crushed.
And it’s not just that oil and nat gas are cheap. These renewables also trade a big valuations because they’re really tech stocks more than they are energy stocks.
If renewables are not expanding, they’re dying. All these energy tech losers garner a Portfolio Grader D rating — they’re all “sells.”
FirstSolar is the largest solar player in the world. So, it’s no surprise that since the U.S. is awash in cheap oil, and the rest of the world is having a hard time making it out of recession, 2015 will not be a banner year of growth for FirstSolar.
Sunpower saw revenue increase just 1.6% in Q3 and earnings growth was down nearly 73% — and this was before oil dropped through the floor. What’s more, Sunpower has already lowered guidance for 2015. Steer clear.
SolarCity is becoming a vicitm of its own success. SolarCity developed a great model that was so popular businesses, governments and homeowners were more than happy to sign up for its 20-year lease deals. But now it’s becoming apparent that SolarCity’s installation subcontractors haven’t been vetted thoroughly and complaints are sprouting like tulips in spring. That means lawsuits, remediation and money going to things that don’t make money; never good for a high-flying stock.
There’s certainly a case to be made for long-term investing in defense, but small companies that are essentially working out their tech niches in the cash-rich ecosystems of the defense and homeland security sectors have a difficult struggle for survival, especially now that spending caps are very tight on defense.
You see, it’s more about jobs than weapons systems. And the small, third- and fourth-tier firms just don’t employ enough people to hold sway with their Congressmen and Senators. Small defense firms’ new whiz-bang products get put on the back burner or their new models get mothballed while those monies are diverted to big projects.
Here are two defense tech losers — both are F-rated in Portfolio Grader:
American Science & Engineering, Inc. (ASEI) produces x-ray inspection and other detection devices for homeland security, force protection and other critical defense and security applications. But once you have machines in place, it’s a while before they need to be replaced. And given the tight budgets at state, local and federal levels, getting more ASEI products isn’t likely a top priority. American Science & Engineering is on virtually everyone’s “sell” list.
Kratos Defense & Security Solutions, Inc. (KTOS) provides engineering, Information Technology services and war fighter solutions primarily for the US military and intelligence services. Earnings were down significantly in Q3 and most analysts are not expecting that to turnaround anytime soon. Slowing momentum and a lack of differentiation from its competition bodes ill for this stock, at this point.
Louis Navellier is a renowned growth investor. He is the editor of five investing newsletters: Blue Chip Growth, Emerging Growth, Ultimate Growth, Family Trust and Platinum Growth. His most popular service, Blue Chip Growth, has a track record of beating the market 3:1 over the last 14 years. He uses a combination of quantitative and fundamental analysis to identify market-beating stocks. Mr. Navellier has made his proven formula accessible to investors via his free, online stock rating tool, PortfolioGrader.com. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.