Despite oil prices’ ability to maintain a level close to $100/bbl., the solar power industry has been thoroughly decimated in 2011. Major bankruptcies, political scandals that have called into question subsides to the space, and intense competition from China have all combined to make an investment in this budding industry a big loser so far this year. Yet, given the appeal of the industry to some from a long term perspective, a few buy-and-holders have begun to dip their toes into the space hoping to get in at a favorable price point that has not been seen in years for some companies in the industry. This trend could really take off in the months ahead as the world’s most famous investor, Warren Buffett, announced plans to have one of his companies make a move into solar power.
Buffett’s Midwestern-based utility company, MidAmerican Energy Holdings, declared that it will be buying the $2 billion Topaz Solar Farm in southern California, adding to the company’s moves in clean and renewable power in recent years. In fact, the move expands the utility’s portfolio beyond wind and electric car production into the solar power space, further diversifying the company’s holdings into a sector that could have favorable tax treatment in years ahead. “The reason for the move from wind to solar is very simple,” Gerard Reid, a London-based analyst at Jefferies, said in an interview. “Tax credits for wind in the U.S. expire at the end of next year, while solar ones run till 2015.” (also read Top Three High Yield Real Estate ETFs)
The farm is being developed by First Solar (NasdaqGS:FSLR - News) one of the largest solar power companies in the space and it comes after the company failed to receive a U.S. government loan guarantee for the farm, putting the 550-megawatt project in danger. Now, however, FSLR can continue to construct the farm and hopefully bring it online by early 2015, helping to take much of the risk out of the equation for the flailing solar giant and rekindle some hopes for the industry heading into 2012 (see November ETF Asset Report).
Thanks to this, some are starting to believe that fortunes may have finally hit a low point for the space and that an upswing may be long overdue. This is especially true for those that believe that some of the weakest members of the space have fallen by the wayside, only leaving the leanest companies in the industry. With this backdrop, First Solar surged in Wednesday trading, adding nearly 10% at one point before falling back a little from this high in mid-morning trading. Still, the losses have been pretty severe for the company as the firm has fallen by nearly 64.6% so far in 2011.
While FSLR is a clear leader and obviously a big beneficiary of this news, the company is not alone in the space and making a play on the whole industry may be the way to go for some investors. This could be especially true for those seeking a slightly lower-volatility choice and are unwilling to make a bet on a particular company but are interesting in making a long-term allocation to the sector. For these investors, the following two ETFs make for great options:
This fund tracks the MAC Global Solar Energy Index which offers exposure to companies in some aspect of the solar power industry. This includes companies that produce products for end-users, manufactures of solar panels, and even firms that are engaged in solar power system sales, distribution, installation, integration or financing; and companies that specialize in selling electricity derived from solar power. The index also includes companies that are not exclusively focused on solar power although it gives these firms a lower weighting than their pure-play peers (also read Forget FXI: Try These Three China ETFs Instead).
The fund currently has about 35 components with heavy weightings going to FSLR, GCL-Poly Energy Holdings, and GT Advanced Technologies (NasdaqGS:GTAT - News). From a country perspective, the U.S. and China each make up about one-third of total assets while Germany at 16.1% also makes up a decent amount of exposure. Unfortunately for those that have been invested in the sector for all of 2011, it has been a very rough period as the fund has lost about 58.8% since the start of January. However, according to the Guggenheim website, the portfolio has a P/E of just 3.5 and a P/B of just 0.6, suggesting that deep value may be finally present in the security basket.
This ETF tracks the Ardour Solar Energy Index in order to achieve its exposure to the industry. The benchmark is a rules-based, modified global-capitalization-weighted, float-adjusted index intended to give investors a means of tracking the overall performance of a global universe of listed companies engaged in the solar energy industry. The Index provides exposure to publicly traded companies from around the world that derive at least 66% of their revenues from solar energy. On a weighted basis, the index constituents derive in excess of 90% of their revenues from solar energy so high correlations to the space can be assured (see HDGE: The Active Bear ETF Under The Microscope).
The basket includes 33 securities with top weightings going towards GTAT, Memc Electronic Materials (NYSE:WFR - News), and FSLR. This solar ETF has a definite focus on small caps with close to 72% in that capitalization level. American securities dominate the portfolio with 42% going to the U.S. although China, Taiwan, and Germany, all make up at least 15% of assets as well. Yet, the fund’s focus on small caps has pushed it to underperform TAN in 2011, losing about 61.7%. With that being said, the fund does have similar value metrics as its Guggenheim counterpart suggesting that it too could be an interesting pick for the long term if one is able to tolerate significant risk.
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