Damaging New York Times Saturday Article: Why Solar Power Stocks Are Still Earthbound
By NORM ALSTER
Published: April 6, 2013
LONG-SUFFERING investors in solar energy stocks had reason to enjoy the first six weeks of 2013. After several years of poor performance while the overall market advanced, solar and other “green” energy technologies were market leaders early this year.
Solar panels at Yingli Green Energy in Hebei Province, China. According to one estimate, installed global solar capacity was up 43 percent worldwide last year from 2011, and could climb an additional 35 percent this year.
But by the end of the quarter, most of these stocks had fallen again. Was the strong performance of early this year simply a dead-cat bounce? What are the prospects for an emerging, relatively expensive technology that seeks to displace dirty — but cheap — hydrocarbons?
At the core of solar’s sorry market performance lies an enigma: solar sells, but it’s tough to turn a profit.
Global demand for clean, renewable energy is not the issue. “Demand has exceeded by far the projections of even two years ago,” Ben Schuman, an analyst at Pacific Crest Securities, said.
At the end of last year, installed global solar capacity stood at 96.4 gigawatts, up 43 percent from 2011 and roughly the equivalent capacity of 115 typical nuclear plants, according to Shayle Kann, vice president for research at GTM Research. Mr. Kann predicted further growth of 35 percent this year, to 129.7 gigawatts.
Nevertheless, company profits in the sector have been erratic — and shareholder profits scarce. The Guggenheim Solar exchange-traded fund, which mirrors a portfolio of solar stocks, fell nearly 30 percent in the 12 months through March.
So what is the most commonly invoked explanation for an industry where sizzling demand translates into sinking share prices? “Chinese industrial policy,” replied Kevin Landis, manager of the Firsthand Alternative Energy
Colm O’Connor, co-manager of the Calvert Global Alternative Energy fund, says he expects the United States, Japan and China to lead this year in solar installation growth. Mr. O’Connor has a position in Kyocera, the ceramics maker and panel manufacturer, which could benefit from adoption of solar power in Japan.
In most areas, solar power is more expensive than coal and natural gas options for electricity generation. But the gap has narrowed, and in places like Hawaii, Italy and Japan, he says, solar is now roughly even in cost. He has trimmed his overall investment in solar, however, preferring other areas of alternative energy. His largest holding is Novozymes, the Denmark-based enzyme maker that stands to gain from the emergence of cellulosic ethanol, made from sources other than corn. Novozymes will capture “a large part” of the cellulosic market, he predicted. “We are favorable on the long-term outlook for cellulosic ethanol.”
Mr. O’Connor also favors companies that help manage delivery of energy from solar and wind sources. The Prysmian Group, based in Milan, Italy, has contracts to connect a North Sea wind park with the mainland grid in Germany. The PSI Group, based in Berlin, markets software that helps to manage the fluctuations in renewable energy production.
Frederick Reynolds, who manages the Reynolds Blue Chip Growth fund, has stakes in Solar City and First Solar. But, he says: “I don’t have much conviction in solar stocks in general at this time. I’m running the risk that I’m early.”
Mr. Reynolds tries to balance long-term optimism with near-term anxiety. “I think they can do well long term,” he said, “but until then there’s lots of volatility.”
ONE factor that may eventually help solar stocks is that institutional investors have relatively small holdings.
For example, they own slightly less than 22 percent of SunPower shares, according to Nasdaq. By contrast, institutions, which include pension funds, insurance companies and mutual funds, own more than 92 percent of Google’s outstanding shares.
Asked if low institutional ownership could turn into a positive, because so much buying power is untapped, Mr. Reynolds said: “I see it as a positive. A lot of institutions may be buying after me.”
Until then, holders of solar stocks can only nurse their wounds. Those who take the lead are often rewarded with arrows in their back. And right now, a lot of solar investors have “backs full of arrows,” Mr. Landis lamented.