Sell-off in solar stocks creates opportunities

Solar stocks have plunged 20.6 percent in May alone sending the year-to-date performance into negative territory, driven by worse than expected first quarter earnings releases in the industry. We believe the sell-off provides an opportunity to pick up solar stocks.

In our Yearly Outlook we put forth the idea that solar stocks would be a great play in 2011 and with at least 30 percent potential. While that target was almost reached in February the latest development in the Guggenheim Solar ETF (see chart below) has erased this year's gain. The main driver is concerns over demand as the Eurozone struggles (the largest Photo Voltaic market), overcapacity leading to price wars and a weak euro.

 Source: Bloomberg

All the arguments against solar are fair and reasonable. However, we believe the upside potential still outweighs the risks and investors will eventually realise that during 2011.

Many investors have talked about solar energy being non competitive and only booming because of government subsidies. While the latter is correct the idea that solar energy is not able to compete in the marketplace is wrong. Mark Little, GE's global research director, was out saying yesterday that GE believes that solar energy could be cheaper than fossil power in five years as technological advancements keep pushing down the unit cost for a kilowatt-hour; the cost of solar cells has fallen 21 percent in 2011. According to research, the cost of solar power is now about the same as the rate utilities charge for conventional power in the sunniest parts of California, Italy and Turkey. It is this underlying trend in unit costs that eventually will support the investment case in solar stocks.

We think fierce competition and continuing declines in production costs remind us of the old days in the computer industry. The constant push for lower prices will ultimately grow the market into a global mass market, but on that path many companies will fail due to inefficiency etc. Overall, we are optimistic on solar energy and believe it will be the largest disruption to utility markets in the coming decades.