Solar Stocks Are Overheated

Until now, we have been huge proponents of investing in the solar sector. This has proven to be beneficial as we have seen demand for solar technology sky rocket with rising oil prices and society's continued effort towards a greener way of living. As a result, we have seen solar stocks significantly outperform the market over the past year (First Solar (FSLR) +560%, SunPower (SPWR) +211%, Trina Solar (TSL) +163%). However, for the first time in almost three years, we are establishing a cautious view of the entire solar sector, as it has become quite overheated.

There is no doubt that over the long term, solar power will be a viable energy source. However, in the near term, there sill remains a number of barriers that prevent the industry from blossoming overnight. Based on the price to earnings multiples of a number of these stocks, the market is acting as if solar technology is going to take over the world tomorrow. The reality is that this is a long term process, and will take a great deal of time and resources to make solar a viable global energy source.

The largest barrier for the industry is the continued reliance on silicon. More than 90% of the companies in the industry produce solar cells that are derived from silicon. As a result, the demand for silicon has risen sharply, along with its prices. Not only are prices sky high, but there have been huge shortages of silicon that have hindered the production capacity of these solar manufacturers. So not only are some manufactures not able to obtain any silicon, but the ones that actually do, see their margins squeezed and are forced to raise the price of their solar products. This ends up moving the industry in the wrong direction, as the major objective is to keep costs low so solar power can be competitive to the price of oil.

Of course there are some exceptions, as there are a few solar companies that either produce solar cells without the use of silicon (FSLR, ASTI) or have locked in silicon supply contracts that would prevent vulnerability to rising silicon prices (STP, TSL, YGE). However, the potential for stock gains in these companies it still dwarfed by the fact that they trade at such high multiples. And with any disappointment on the earnings front or with expansion developments, the current rallies in these stocks could come to a screeching halt.

There have also been recent concerns that Congress may move forward on an energy bill without including an extension of tax solar credits. Tax credits have historically been a huge driver for the industry, and have given businesses tax incentives to invest in solar technology. If a bill is actually passed that does not extend these tax credits, we will likely see investment in solar technology decrease in the near term.

Based on all of these reasons, we suggest selling the following names, and even consider taking in some short positions with a 3-6 month time horizon.

Yingli Green Energy (NYSE: YGE)

Current Price: 31.35

Year-end Target: 25.50

6 Month Target: 21.00

SunPower Corp. (Nasdaq: SPWR)

Current Price: 122.00

Year-end Target: 107.00

6 Month Target: 90.00

Suntech Power (NYSE: STP)

Current Price: 65.10

Year-end Target: 58.00

6 Month Target: 48.00

Evergreen Solar (Nasdaq: ESLR)

Current Price: 14.20

Year-end Target: 12.00

6 Month Target: 9.50

Canadian Solar (Nasdaq: CSIQ)

Current Price: 16.05

Year-end Target: 12.75

6 Month Target: 10.00

Disclosure: Author has a short position in some of the above mentioned securities.

Comments

[buysolar]

seekingalpha.com is now shorting solar.

Shame on you! You are no longer valid.

The world no longer cares what you think, for you do not care about the world.

[dslnbull]

you come with this article because you took short psition in some stock. You want to spread the word to the small investors. You guys telling people to buy YHOO, LOCM, NINE ..and so on. You guys are really come this article with fear.I think you must have lot money in OTC stock ,yhoo ...YHOO price target 50 dollar ???????It will never ever see 50 dollar in your life time.

[solar jim]

I'll take that bet on SPWR being $90 in six months. It's already been punished for $50 over the last week. Don't think you'll see much downside on this one at these levels. It's what some people call oversold.

[Mark Anthony]

Neal:

You looked at the silicon supply prospect and hence made an exception case for FSLR. I am sorry to say you are completely wrong. FSLR faces a way much worse supply nightmare than silicon based solar players.

Silicon is the MOST abundant element on earth. Any silicon shortage is only temporary. It's only a matter of setting up new silicon factories to get new silicon supply. Long term, silicon shortage is not the fundamental factor.

FSLR, on the other hand, uses the cadmium telluride material. Cadmium is extremely toxic and extremely harmful to environment. But the worse problem is tellurium is one of the rarest elements on earth, rarer even than platinum. According to Arizona State Geologist, the global production is estimated to be only 215 tons per year. Some estimate put it even lower at 168 tons per year.

Global tellurium price raised from below $4 a pound to well over $100 a pound in just a few years, implying severe shortage, even without significant CdTe demand yet, as FSLR only start to ramp up production this year. Emerging demands include DVD and computer flash memory, among other things.

In comparison, FSLR consumes about 135 tons of tellurium per GW of solar panels. I do not know how they are going to find the tellurium source when their new factories start up in Malaysia. Even if they can get the tellurium, it's likely their own demand will drive tellurium price up to such high level that they are no longer profitable.

FSLR is a company whose profit margin and growth potential is tightly squeezed and capped by its own tellurium demand. There is no future for this company. It really does not deserve this kind of ridiculous valuation.

[Mark Anthony]

Let me provide some link to supplement the tellurium knowledge

Is a tellurium rush in the making:

www.resourceinvestor.c...

Arizona Tellurium Rush:

arizonageology.blogspo...

[k5cox]

What you are saying about solar is exactly what happened to ethanol stocks. I was holding shares in 3 companies who produced ethanol and at one time could have made a hefty profit...but I did not know to get out and finally disposed of the shares at a hurtful loss. So I am not going to let that happen again. I sold all my Canadian Solar at a nice profit.
Thanks for the ''overheated article."

[Mark Anthony]

There is now a Seeking Alpha article on First Solar and tellurium:

First Solar Vulnerable to a Tellurium Shortage

seekingalpha.com/artic...

I recommend shorting FSLR. I also hoard tellurium metal ingots.