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NEW YORK (
TheStreet) -- You've heard the rhetoric before: a rising price of oil will shift more attention to alternative sources of energy, and that's a trigger for bullish trading in solar stocks, and clean energy stocks more generally.
In fact, investors are hearing the rhetoric again nowin. Between President Obama's State of the Union call for 80% of energy from renewable sources by 2035, to the political unrest in Egypt and the spike in crude, the solar/oil trading rhetoric is back in the headlines. Talking heads on
CNBC will point to a rising price of oil as a reason for investors to give solar stocks a look.
Indeed, on Thursday afternoon,
CNBC aired the latest in what's become a regular, if ad hoc, segment the past week, among all the Egypt/oil market news coverage, which more or less amounted to the statement, "Buy First Solar because of the rising price of oil." The latest talking head, Brian Stutland of Stutland Securities, said investors should take a look at the solar index ETF, also the
Claymore/MAC Global Solar Index(TAM). We have not charted the performance of the Claymore/MAC Global Solar Index in this story, but it follows the same pattern as the charts included in this article: as oil moves up and to the right, so does solar.
Should this really be in the minds of investors among all the reasons to trade in solar stocks?
The facts don't support the rhetoric, but that doesn't mean the rhetoric won't support trading action.
The case can be made that the trading action linking solar stocks to oil prices was obvious this week in both directions. First, as Brent crude rose above $102 and WTI oil rose above $92 with the escalation of the political unrest in Egypt stoking fears about a Middle East contagion and Suez Canal shut down, solar shares rallied. It wasn't just the price of oil. A bullish outlook from
MEMC Electronic Materials(WFR) seemed to push the solar sector higher, too. Likewise, when crude prices dropped by 2% on Friday, it coincided with a weak outlook from solar inverter company
Power-One(PWER) and solar stocks dropped.
It certainly wasn't all about oil. A Chinese solar stock like
JA Solar(JASO - Get Report), for example, didn't pop on Monday or Tuesday when the Egypt crisis was in full swing, but it did pop on Wednesday after the MEMC report, and it was down not just 2% on Friday like crude oil, but close to 5%.
Vote Now About the Oil Price-Solar Stock Trading Connection
Theodore O'Neill, analyst at Wunderlich Securities, wrote a research note on Wednesday stating that
First Solar(FSLR - Get Report), as one prime example, is a stock that may sustain recent trading gains as long as the price of oil is high. First Solar rose to an 18-month high this week and as a result, was hit with two downgrades, purely based on valuation and lack of any near-term trigger to justify buying First Solar shares at the current level.
It's no surprise that First Solar is often the featured solar stock in market pundit arguments in favor of a link between the oil and solar stocks. It's the darling of the U.S. solar crowd and the low-cost leader in solar holding the line for U.S. "excellence" in all things versus the onslaught of the low-cost Chinese solar companies.
The chart above illustrates that the coupling of the First Solar and oil trade is not without its merit, however, is it really a credible trade on alternative energy sentiment, or does it reflect the fact that solar stocks rise during periods when all equities rise, and oil has more recently been linked to the performance of the global equities market?
Let's come back to that question in a moment.
The Wunderlich analyst O'Neill thinks that First Solar shares will continued to be linked to oil, and as long as oil prices stay above $80, it's a good thing for the solar bellwether. "As the price of oil rises, so should the price of FSLR shares. Our analysis shows that FSLR shares trade with the price of oil because as the price of oil rises, investors assume the market will seek alternatives to generating power," the analyst wrote on Wednesday, as First Solar hit another 52-week high.
"We recognize in the near term the price of WTI spot has an overwhelming impact on the [First Solar] stock. Why? Because investors view alternative forms of energy creation as becoming more cost competitive as prices of traditional energy generating raw materials increases. Indeed, if WTI were at $100 tomorrow, the model we developed to show the relationship to oil would peg FSLR stock at $197, more or less," the Wunderlich analyst wrote on Wednesday.
O'Neill says the best chart version of the oil price-dependent First Solar trade is the XOI Amex oil index (see chart above).
"Based on the XOI, FSLR stock should be trading at $158, which is about where it is right now," the analyst wrote on Wednesday. By the end of a big bullish day of solar trading on Wednesday, First Solar shares were above $164. On Friday, as crude oil dropped 2% in trading, First Solar declined by 2.6%, sending it back to the $158 mark.
A recent Goldman Sachs upgrade of First Solar, which included adding First Solar to Goldman's conviction buy list, has been among the headlines sending First Solar shares higher in the past week -- and given Goldman Sachs' global influence and its poor Main Street image, a cynic might suggest that maybe it's behind the political crisis in Egypt as a way to bid First Solar up while it and its hedge fund pals like
John Paulson short the entire solar sector! This satirical market cynicism might at least have more investment logic than a straight line between point A rising oil prices and point B rising solar stock values.
Vote Now About the Oil Price-Solar Stock Trading Connection