At Long Last, Solar Sector Offers Value

Updated with closing stock prices

Value 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.

FSLR Weekly (NYSE) -- First Solar Inc
FSLR Weekly Chart
Source: TradeStation

For the crystal ball readers who bet on First Solar as the big winner and lone survivor of the super-hot solar IPO deluge of 2006, collect all the marbles and kewpie dolls -- you've seen FSLR go from a $20 dollar stock to trade for more than $300 in 2008. For the rest of us who missed this 15-bagger, First Solar has continued to disappoint as an investment for the last year and a half. It's been unable to deliver on the promise of solar panels on every house that would have legitimized the overhyped multiples it carried.

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.

FSLR Daily (NYSE) -- First Solar Inc
FSLR Daily Chart
Source: TradeStation

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.
At the time of publication, Dicker owned shares of FSLR, but positions can change at any time.

Dan Dicker has been a floor trader at the New York Mercantile Exchange with more than 20 years' experience. He is a licensed commodities trade adviser. Dan's recognized energy market expertise includes active trading in crude oil, natural gas, unleaded gasoline and heating oil futures contracts; fundamental analysis including supply and demand statistics (DOE, EIA), CFTC trade reportage, volume and open interest; technical analysis including trend analysis, stochastics, Bollinger Bands, Elliot Wave theory, bar and tick charting and Japanese candlesticks; and trading expertise in outright, intermarket and intramarket spreads and cracks.

Dan also designed and supervised the introduction of the new Nymex PJM electricity futures contract, launched in April 2003, which cleared more than 600,000 contracts last year alone. Its launch has been the basis of Nymex's resurgence in the clearing of power market contracts over the last three years.

Dan Dicker has appeared as an energy analyst since 2002 with all the major financial news networks. He has lent his expertise in hundreds of live radio and television broadcasts as an analyst of the oil markets on CNBC, Bloomberg US and UK and CNNfn. Dan is the author of many energy articles published in Nymex and other trade journals.

Dan obtained a bachelor of arts degree from the State University of New York at Stony Brook in 1982.