This will be a series of articles. We have lots to cover off. Solar is part of the energy sector. I think the time is right to give it a little illumination.
When the XLE sold off, solar was hit as well. Why? When investors sell the XLE, the ETF sells off various underlying positions which are producers, oilfield service and energy utilities. Solar is not a component of the XLE. The more selling that takes place, the harder all the components of the ETF are sold off. However, other correlations are in play and other energy industry stocks are also sold. When power utilities get sold off, that can track to solar. Coal and Natural Gas have been weak and solar is compared with those to generate power. So the solar industry, which has been pulled lower within the energy sector, is one of those. This has ramifications both ways. People who are switching to solar are making a decision for a longer period of time rather than just one or two months of price advantage. When the price of oil and energy stocks dropped, it might be an advantage to look at solar stocks. Because they have pulled back, this can be good for us, even though no meaningful changes are taking place in their business. One other concern is how solar competes in terms of the cost of energy as it has to compete at different price levels with other sources. There is some power generation based on heating oil as well. However, the comparison is really very thin. Again, people who are expecting to use solar are making a decision for a longer period of time than just one or two months of price advantage. When the price of solar stocks drops due to sector weakness, it can be happening even though no meaningful changes are taking place in their business. This would appear to be the case today from my perspective. So lets get into it.
Upon visiting the First Solar website, I found this chart.
FIRST SOLAR IS COST COMPETITIVE WITH CONVENTIONAL ENERGY SOURCES TODAY
First Solar provides a LCOE of between $0.07-0.15/kWh, depending on irradiance levels, interest rates, and other factors such as development costs.
Source: www.firstsolar.com
The chart demonstrates that at a utility level, the solar power system compares very favourably.
Now we are not going to get into a large fundamental analysis in this series of articles, but it is critical to understand that solar can compete with three of the most affordable methods of energy production. Two of these methods (coal and nuclear) have extreme resistance from the wider population and Natural Gas usually faces some form of resistance on a local level. Solar is not really disliked by the general population. In the following video, you can see some of the main reasons why solar can become the energy source for residential and commercial applications. The date of the video was September 2014 and since then the energy stocks have all pulled back giving us more time to prepare.
So that is about as deep as I am going to get into some of the base case fundamentals for solar. Understanding the four benefits at play is critical to understanding why solar may become the source du jour. So why am I publishing this series of articles now? Well, it was very interesting that the week David Dodge of Green Energy Futures and I shot the video, it was also the week after the equities market were completing the September high before the almost 10% pullback in the $SPX. Since then, the energy sector has been crushed and along with it, the solar stocks have been dragged down. Below is the three month view and the one month view of a Chartlist I keep called Solar Stocks, but it also contains other renewables like wind power. We need to keep an eye on battery technology so that is why I have Plug Power on the list as an example. I am sure over the upcoming years the list will grow substantially. Check out the size of these pullbacks. First Solar (FSLR) fell 30% as an example. So it might be more timely than ever to be aware of the size of the opportunity in front of us. GTATQ was a technology company working with Apple and some of their tech had applications into this morphing industry group. GTATQ has declared bankruptcy so that was a big fall from grace. It is a good reminder of how new innovative technology can crumble quickly so this is a fast moving sector both ways. Always keep this in mind.
Here is the Three month view.
Here is the One month view.
Here is a video link from Solar City's CEO (SCTY) on CNBC last week. Click here to watch the video. It was nice to see him confirm all the things that I expect from the solar industry group. He makes a compelling case for the battery.
So today, I've explained why solar is on my radar. As I publish this article, I don't have any positions in the industry group yet. I think it is one of the most interesting industry groups from a macro and micro perspective. Tomorrow, I hope to separate some stocks out from the list and narrow our focus.
Good trading,
Greg Schnell, CMT
