Solar stocks and related ETFs started 2014 on a high note in much the same way they left 2013, fueled by the Chinese government’s ongoing plans to move away from relying on exports and to limit construction of new photovoltaic manufacturing plants. These shifts have paved the way for U.S. manufacturers to pick up the slack.
The Chinese government’s plans to move away from exports to a more consumption-oriented economy includes plans to accelerate the pace of mergers and acquisitions, and improve self-sufficiency of raw materials such as polysilicon and photovoltaic cell manufacturing technology, according to China’s State Council, in a statement published on its website.
It also plans to average new PV-installed capacity of about 10 million kilowatts by 2015, leading to further margin expansion by Western solar manufacturers such as SolarCity and First Solar.
J.P. Morgan analysts are bullish on the sector , and expect 2014 to start out strong, with photovoltaic suppliers’ gross margins trending in the 15-20 percent range; earnings before interest and taxes ticking up into single digits; and, not least, improving balance-sheet health for solar companies.
Sector stock and related ETFs are already showing signs of a robust start with the Guggenheim Solar ETF (TAN | B-37) and the Market Vectors Solar Energy ETF (KWT | D-31) up 13.8 percent and 12.8 percent, respectively, month-to-date, after gaining 127.3 percent and 94.6 percent, respectively, in 2013.
Chart courtesy of StockCharts.com
Solar manufacturers such as Yingli Green Energy Hold. Co.—which announced it’s forming a joint venture with state-owned China National Nuclear Corp. to create 500 MW of utility-scale solar projects—is up 43.3 percent year-to-date.
Also, SolarCity Corp.—which installs solar power systems for homes, businesses and governments—is up 18.6 percent year-to-date, helped by Goldman Sachs analyst Brian Lee’s recent upgrade of the security to a buy rating and his raising his price target from $65 to $80 a share.
Lee reckons that companies with a presence in the rooftop niche market will perform very well as well as solid industry fundamentals.
But are TAN and KWT viable long-term holdings, or mere speculative plays?
Investors looking for a repeat performance from TAN and KWT in 2014 should curb their expectations, according to Paul Baiocchi, vice president of analytics at IndexUniverse.
“If you look at where TAN’s portfolio has come, how far it’s run and where the valuation is, it’s hard to make the case that the multiple is justifiable,” he said.
He explained that TAN’s portfolio, which includes SolarCity, is currently trading at a negative multiple, making it an extremely speculative play for investors.
SolarCity currently has an earnings per share of -1.22, its profit margin is -71.2 percent and its operating margin is -59.0 percent. Yet it’s trading at $67.50.
“There’s a lot of uncertainty and speculation baked into TAN and the prices of the shares that it holds, so, if investors are looking for speculation and want to take on risks of a portfolio that’s trading with a negative earnings multiple, that’s one thing. But if people are looking at it as an attractive risk/reward proposition, then they need to be very careful,” added Baiocchi.