Updated with closing stock pricesValue is always the key to finding good investments. For an old oil guy like me, the solar stocks have never represented good value and I have never recommended them. But now, the tide may be changing. Solar stocks have been "darling" investments. They represent the promise of new technology that most people feel will be an inevitable part of our energy future. They are "green" stocks and inspire good feelings in those who own them, as if the very act of investment somehow helps the environment. And with oil continuing to see very high prices, the rush into alternative energy companies has seemed liked the "smart" investment to make. For all these reasons, solar stocks have always seemed to me to be overvalued, running far ahead of what the companies actually could deliver in growth and earnings. Let's look at First Solar ( FSLR), which is far and away the solar company with the largest market-cap and which has always been the benchmark for measuring the sector.
2009 has seen more difficulties for the company and the sector. Falling prices in polysilicon, which is the raw material which makes up photovoltaic cells, have forced First Solar and other panel makers to write down much of their inventory, killing their balance sheets. In addition, the credit crisis has shelved most plans for quick rollouts of solar sources as alternative energy in large municipalities. Lastly, the fallout from lower oil prices from late 2008 into the first quarter of 2009 killed the impetus for alternative energy investment. The bottom line is that much of the hype and "darling" feel for the solar stocks is gone. Investors who felt "good" about their solar investment have been dumping the stock in droves, with "bad" feelings about lost money overcoming a moral appetite for a green investment.
Since doubling from the March lows of around $100, First Solar has given back much of that amazing climb. The final straw was a Barron's article Monday that contended that the company's earnings reports were "aggressive" (a euphemism for inaccurately pumped-up). The stock lost 5% to close around $132. This is exactly what we have been waiting for: a little selling of stock and the return of a little value to an overhyped market. First Solar, and all the other solar stocks, including Suntech Power ( STP), LDK Solar ( LDK) and JA Solar ( JASO), are now at last starting to peak my interest. There is a positive, value-driven story to be told. ( First Solar closed down $1.69 to $131.43 on Wednesday; Suntech Power finished up 8 cents to $16.40; LDK Solar closed up 7 cents to $9.07; JA Solar closed down 1 cent to $3.90.)
The write-downs of polysilicon will be a positive moving forward, as solar panels become a cheaper and therefore more cost-effective alternative to traditional energy sources. Price-to-earnings ratios on these stocks have reached sustainable levels. For First Solar, the ratio is a less-ridiculous 19. Although still in the range for growth stocks, that represents a big move down from the multiples in the 30's and 40's that the stock had two years ago. The Obama administration's commitment to green energy in the stimulus plan will slowly show its effects. In one example, First Solar just inked a contract with California to build two solar-powered electricity plants to service 170,000 homes. Value is finally arriving in the solar space, and the sector is at long last worthy of a look.