After what seems like decades of struggling to keep up with cheaper fossil fuel alternatives, this year could be the year that solar energy finally becomes mainstream.
By almost all metrics — from installed wattage to costs — solar energy is just absolutely killing it.
You’d think that the various solar stocks would be soaking-up all these rays, but they haven’t. In fact, the broad MAC Global Solar Energy index has fallen about 12% this year since hitting its peak back in April. The main ETF tracking the index — the Guggenheim Solar ETF (TAN) — is now actually sitting close to a 52-week low.
Considering the prospects for solar energy, that drop should make almost any value investor want to put on some shades and head out into the sun. After all, solar stocks could be one of the biggest values in the entire energy patch.
No Love For the Solar Stocks
The latest report from the Solar Energy Industries Association and GTM Research shows the U.S. added an additional 1,306 MWdc worth of solar capacity in the first quarter of the year. This is now the sixth consecutive quarter in which the U.S. has added more than 1GW in new PV installations.
That amount of new capacity is impressive in itself. However, that number is still greater than the total amount of new natural gas-based electricity generation capacity for the quarter. Thanks to new regulations and cheap prices, utilities have been switching away from coal. The general thought was that natural gas would get the nod as the fuel of choice.
It turns out that solar is actually getting a bigger piece of the pie. In fact, SEIA’s report shows that solar was responsible for 51% of the total new generation capacity in the first quarter.
Those installations aren’t just coming from utilities. Residential solar capacity has surged. The number of residential MW’s installed jumped 11% over the fourth quarter of 2014 and increased 76% year-over-year. Silencing critics claiming solar can only survive with subsidies, more than one-fourth of all residential installations occurred without incentives.
Globally, the story is similar. More than 12GW worth of new solar capacity were added during the first quarter of 2015. That 12GW was spread over a variety of both developed and emerging markets. And in many areas, solar has finally reached the holy grail of grid parity.
Add these installations plus the bullish forecasts for the rest of the year — not to mention dwindling costs and improved efficacy ratings — and you’d think that solar stocks would be going gangbusters, right?
Wall Street and many investors continue imagining correlations between solar stocks and oil prices. Thus when oil is high, solar stocks do well. When oil is low like it is now, the opposite is true.
This is completely wrong. We don’t use oil to generate electricity: There are hardly any oil-burning generation facilities left in the country, or in the world for that matter. Oil is predominantly a transportation fuel.
The truth is, solar and oil are not real substitutes for each other anymore.
Natural gas, sure. But even then — as supported by the SEIA’s latest data — utilities are still adding plenty of solar capacity in the face of low natural gas prices. That’s because efficiency measures and panel costs are now comparable with the fossil fuel. Any additional incentives and tax breaks are just gravy.
And yet, solar stocks have plunged.
Shares of the utility-scale stalwart First Solar (FSLR) are now 34% below its 52-week high, while rival SunEdison (SUNE) has been decimated by more than half its value in the last month alone. Pure-panel players like Trina Solar (TSL) have experienced similar drops despite rising shipments.
Even newly listed solar stocks haven’t been able to leverage IPO-mania to escape the drag. Residential solar installer Sunrun (RUN) offered at $14 per share in mid-August, only to be had for around $10 a week later. The same can be said for newly listed yieldco TerraForm Global (GLBL).
Solar Stocks Are Values in the Making
On one hand, we have rising demand and an extremely bullish case for solar’s ascension into the prime time. On the other hand, we’re still collectively confused as how to handle solar when oil prices dip. The market just doesn’t get it. If that doesn’t sound like the definition of value investing, than I don’t know what is.
At the end of the day, solar stocks are huge buys right now.
For investors looking towards the sector, now could be the right time to snag some shares on the cheap. You finally have a bullish case that isn’t just all about hope. The world is actually treating solar like a main piece of our energy pie for the first time: We’re adding real gains to capacity, panel efficiency is rising and costs have hit the point where they don’t need to be subsidized.
And yet the market still is treating solar like some ancillary or hobby business. That’s just not right. The disparity between the two sides should close as market participants eventually realize that solar is here to stay, and that the economics of it are actually beginning to work. Investors have an opportunity to capitalize on that fact.
Buying shares of the beaten down solar stock leaders — FSLR, SUNE, TSL, SunPower (SPWR) or even the TAN ETF — could be one of the biggest profit generators for portfolios in some time.
Solar is here, and it’s not going away.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned stocks, but is considering opening a position in FSLR or TAN.