April 26, 2010 – Solar manufacturers, poly producers and downstream firms are all down about 9% YTD, underperforming the broader markets. The conventional wisdom has been margin pressures as a result of declining poly prices, ASPs at the midstream level and tight credit which has impeded projects. We were asked by a reader what our current thoughts are: Q: Now that the year is 1/3 over, it looks like the solar demand projections that I read last year are not coming to fruition, based on the solar stocks' prices. What do you think? A: I guess I would say that since mid-2008, the conditions in the solar industry have never been as strong. This is reflected in the California Solar Initiative data I mentioned in this week’s newsletter (where California can be taken as a proxy for the U.S. markets, given that it is by far the most active state in the U.S. in terms of solar). So far this year, total applications for the CSI are 166MW compared to 87MW for the same period in 2009. Commercial has rebounded, up 124% Y/Y for the same period. Then, look at Germany, which had a remarkable 1.5GW installed in Germany in December alone. This was driven by a race to take advantage of the FIT before reductions came into effect. Now it looks like the reductions will come in July, so look for this market to remain hot. Expectations are that the oversupply in the markets is beginning to get soaked up a bit, which is being helped by the fact that more manufacturers are looking to off-take agreements and contract manufacturing relationships instead of expanding their own capacity right now. Recent projections for solar growth include: · PV market will grow to 10GW in 2010 (IMS Research) · PV market will grow to 13.6GW in 2010 (iSuppli) · Clean Energy projects the solar industry to grow from $30 billion in 2009 to $99 billion in 2019 · PV Market will grow to 10.7GW in 2010 (EPIA) · JA Solar recently increased the forecast for its business · Evergreen Solar just reported that Q1 shipments set a record This month several key players will release results including First Solar, Suntech, Yingli, LDK and SunPower, so we will get more detail how businesses are fairing. From a macro perspective, the consensus is generally that solar will continue to be a strong growth industry, which is supported by the anecdotal notes about California and Germany above. So I think solar remains a great place to invest. But it is a stock picker’s market. Tier one manufacturers should continue to show stronger results in the next couple quarters, keeping in mind the following points: · Companies with high exposure to euro will be negatively impacted in near-term; · ASPs will continue to decline but we are getting close to a trough; · Low cost is more important than brand, and Chinese producers are taking market share; As always, I would strongly suggest that after you identify the low-cost, differentiated solar manufacturers and technologies to add to your portfolio, you keep in mind that the broader markets are likely due for a pullback which will work in your favor from an entrance point perspective if you are disciplined. For example, all things being equal: · Sell puts on stock you want to own on dips below 10,897 on the DJIA (getting paid a premium to commit to buying a stock you want to own at a lower level), start accumulating at 10,200 and get aggressive at 9,900; · Sell puts on stock you want to own on dips below 2,400 on the Nasdaq, start accumulating at 2,213 and get aggressive at 2,125; · Sell puts on stock you want to own when the S&P 500 dips below 1,173, start accumulating at 1,094 and get aggressive at 1,056. Even the companies best positioned to perform can be ‘dogs’ if you are indiscriminant about entrance points.