After enduring a miserable 2010, most investors were pleased to see solar hit the ground running this year, as a number of equities tied to this industry enjoyed double digit gains for several months. But as the year progressed, solar stocks quickly began to reverse their winning ways, dragging them even lower than where many had been at last year. These extreme losses come as a thorn in investors’ side, especially given that solar energy is arguably the fastest growing renewable energy in the world. Last year saw the overall industry grow by nearly 73%, leading to an average annual growth of 39% over the last decade [see also Company Spotlight: First Solar (FSLR)].
But if solar’s overall capacity is really spreading like wildfire, why are the equities that track it not reaping the benefits? There are a number of factors that have contributed to the decline in these assets, but three in particular stand out from the rest:
1. Lack Of Funding
Like so many alternative energy programs, solar relies heavily on government subsidies and favorable tax treatment to get its business off the ground. Unfortunately, in times like these, alternative energy spending comes last on the list for various governments, as congress is already dealing with overwhelming budget cuts and deficits. Perhaps the most prevalent example comes from Solyndra, a solar company that was heavily backed by the federal government, but was forced to file for chapter 11 bankruptcy and lay off all employees. Though the company cited plummeting silicon prices for its main losses, it is clear that the tax breaks totaling in $25 million, and government backing of over $500 million was simply not enough to keep it going [see also Three Things Wall Street Journal Didn’t Tell You About Commodities].
But for the time being, the government sees more important things to spend money on, and rightly so given the drowning economy that we are desperately trying to keep afloat. Though solar’s capacity may be growing, a lack of government subsidies is eating into bottom line returns, as many companies heavily rely on this funding to remain profitable, ultimately driving down their stock prices [see also Detailing Gold’s Wild Q3].
2. Crude Oil Prices
Though crude oil has seen something of a rebound in the last week, its prices have been steadily dropping throughout 2011, as the commodity climbed as high as $110 per barrel earlier in the year. Since the beginning of July, crude has been sinking at an alarming rate, dipping down to nearly $70 per barrel before recovering to a more steady price. Not coincidentally, crude’s demise created a very similar pattern in solar stocks. When crude oil prices drop, demand rises as people can suddenly buy much more with the same amount of money, and when the demand for crude increases, it drastically cannibalizes the demand for solar [see also Crude Oil Crushed: Buy or Sell?].
Solar energy, and all alternative energies, have trouble competing with crude’s low prices, and that has been one of the main barriers to entry in the economy. When crude is cheap, there is simply no way for these energies to compete with its prices, putting a mountain of pressure on the stocks from each individual sector. Note that this process works in reverse; in 2008 when oil was sitting at $140 per barrel, solar stocks had been performing extremely well, then as crude came crashing back to earth, so too did the high flying stocks. Investors in the solar industry need to keep a watchful eye on crude oil prices, as it has a parallel relationship to solar equities.
3. Chinese Competition
Though solar stocks in China have felt the pinch like everyone else, it is the competition that these companies offer that is hurting the industry. A number of Chinese solar firms have high government funding, unlike the developed world, allowing them to set the market with extremely competitive pricing. This forces a number of American and European firms to sell their products for lower than they would like, and takes a major slash out of revenues. Many have accused the Chinese market of over-saturating the solar space, as there are now a wealth of cheap photovoltaic modules on the market and not enough projects to fill them with [see also 25 Ways To Invest In Silver].
Below, we outline three solar equities that have been hit hard in the latter half of 2011:
- First Solar (FSLR): One of the most popular solar companies, this U.S. based firm has suffered losses of 56% on the year, with 57% losses from July 1st through now, proving that second half of the year has been extremely hard on solar stocks.
- JA Solar Holdings (JASO): This Chinese solar firm is an investor favorite with an average daily volume topping 5 million. This stock is down 72% in 2011 and has incurred losses of 66% since July 1st.
- Guggenheim Solar ETF (TAN): This fund features a basket of solar companies from all around the world, giving investors broad exposure to the industry. Like most solar equities, TAN has had a rough 2011, dropping 52%.
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Disclosure: No positions at time of writing.