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Solar Power Is Still in the Dark

NEW YORK ( TheStreet) -- Several years ago I wrote a couple of articles for TheStreet that were negatively slanted toward investing in solar stocks. I called them a fad. To preface this update, it would be great if things like solar panels on every roof or turning uninhabited desert in Arizona and Nevada into solar farms made economic sense, but for now they don't.

There have been two types of obstacles that have existed for this group and for now there are no signs of improvement.

The first is the extent to which solar companies have relied on tax credits or other forms of subsidy for their customers to buy and install the product. This is not just a U.S. phenomenon but is also the case in Germany, as evidenced by that country's large weighting in the Guggenheim Solar Energy ETF (TAN) and the Market Vectors Solar (KWT).

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Subsidies have played a huge role, but Germany and Spain have both been reducing these subsidies, threatening the future viability of the industry. This has not been an issue in the U.S. yet, but given the state of financial affairs in the U.S. it would not be a shock to see subsidies cut. That would certainly be another nail in the coffin of the industry.

The other element has been how solar stocks and the ETFs have tended to trade. Before this year the correlation to oil stocks was very high. The logic was that as the price of oil goes up it generally benefits the oil companies but also creates more perceived need for solar products. When oil prices went down it generally hurt oil companies but created less urgency for solar products.

This year that dynamic seems to have changed as the Energy Sector SPDR (XLE), which is a broad proxy for the energy sector is essentially unchanged for the year while the TAN and KWT ETFs are each down about 50% this year. I believe this year's performance is attributable to the subsidy issue and what that might mean for the entire industry.

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SYM TRADE IT LAST %CHG
XLE $81.98 -0.57%
KWT $88.79 -1.57%
TAN $48.51 -2.88%
FSLR $63.43 -2.04%
AAPL $130.28 0.47%

Markets

DOW 18,080.14 +21.45 0.12%
S&P 500 2,117.69 +4.76 0.23%
NASDAQ 5,092.0850 +36.0220 0.71%

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