Is Solar Dead?

October 14, 2011

Solar stocks are getting crushed and many are now trading like penny stocks, but could this sharp sell-off be a bit overdone?

Alternative energy stocks have historically been dependent on two factors—high oil prices and government subsidies. Now, with many governments around the world mired in debt and strapped for cash, and oil prices falling sharply amid fears of a global recession, alternative energy stocks are getting hit especially hard.

Add the Solyndra bankruptcy to the mix, and investors are selling solar stocks as if they’ll all eventually be Solyndrafied.

The pessimism throughout the entire sector can clearly be seen in the sell-off in two ETFs focused solely on solar energy: the Guggenheim Solar ETF (NYSEArca: TAN) and Market Vectors Solar Energy ETF (NYSEArca: KWT).

Over the past year, TAN and KWT are both down over 60 percent, even after a near 15 percent rally just over the past week. Since the beginning August, when the markets took a nose dive, they’re both down close to 48 percent.


Source: Bloomberg

But it’s precisely during these times of extreme pessimism that investors have opportunities for making good long-term decisions. True, the Solyndra debacle is still ongoing, and it can potentially slow government funding for solar makers in the United States.

But will the United States give up on solar?  Probably not.

How about China?  China is already the largest solar producer in the world and expected to significantly increase its energy mix with alternatives in the coming years, with a large portion of that coming from solar energy.

And don’t forget about Germany, which after the tsunami and Fukushima nuclear disaster decided to rid itself of nuclear power in the coming years.  Germany recently reported that it got almost 21 percent of its electricity from renewables in the first half of this year, a new record.

TAN and KWT are both global funds, with a large weighting coming from China and Germany.  In fact, almost 34 percent of TAN is weighted in Chinese companies, including beaten down key solar players like Trina Solar and Yingli Green Energy, while Germany makes up almost a 15 percent weighting.  Meanwhile in KWT, Chinese and German companies make up almost 45 percent of the fund.

Sure, in the wake of Solyndra’s bankruptcy and depending on the outcome of the European debt crisis, solar stocks may continue to see some volatility.  While more bankruptcies in the sector are always possible, it’s hard to imagine the entire solar industry disappearing.

The great part of ETFs is that you can own the entire sector through a basket of securities instead of holding individual solar stocks.  Funds like TAN and KWT can therefore reduce the risk for an investor potentially losing their entire investment should another solar company go bust.

While volatility in the sector may continue for many more months or even years, for long- term investors who think the solar industry will survive and eventually become a larger portion of the world’s energy mix, TAN and KWT are beginning to look like interesting plays.

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