"Turn your face to the sun and the shadows fall behind you.
Maori Proverb"
As one should have expected oil and other commodities have staged a short rebound over the last several days, and while I still think oil will end the year lower, I couldn't resist to take a part in this "inevitable" bounce- what goes down so quickly has to go up for a little while :) Remember the "dead cat bounce" analogy- given how fast commodity stocks fell in July/August, it is a logical outcome for them to stage a short term bounce even if long term they are still poised to go lower...
I pointed out in numerous articles already -in my opinion, commodity stocks as a group have topped out in early July and now the new long term direction is down. Because of that, it is highly unlikely (not impossible :)) that I will buy O&G stocks outright in the nearest future. But as my trades from last week's article on MSN should have shown (due to production issues article got posted but trades did not), I have grown increasingly interested in solar stocks as an alternative way to play high energy prices.
Some might ask "Heh? "Isn't alternative energy all one big fairy tale"? My answer is "not so fast"- regardless of where the oil prices ends up in the short/medium term, I think we as a nation have finally gotten a message loud and clear- anything (except ethanol) that can get us of the "oil addiction" is a good thing. Wind and solar are the logical way to go...
I have stayed away from solar field for quite a while as it simply became too hot, overvalued, irrational and crowded earlier this year. Trading prices of names like LDK, CSUN and SOLF seemed to defy any fundamental logic as they became "new darlings" of momentum crowd. "All solar stocks are a buy" and "opportunity of a lifetime" scared the hell out of me and I sold my positionss. But, just as I expected, the crude reality of very tight silicon supplies, lower European subsidies and cut-throat competition finally set in, and led to the most logical outcome- prices for most of these names have been cut in half and jokes about "silly" solar companies/ investors became a staple in many media outlets.
So with that in mind, being a contrarian investor I really am, the amount of "fear driven" selling finally became so encouraging, that I decided to do my research on the sector all over again, and about three weeks ago I finally picked the same three names I bought last year (STP, JASO and CY(SPWR))...
I don't want to go into deep detailed description of all the financial reasoning behind my decision, the numbers speak for themselves. But some of the softer reasons why I believe that some (not all!) of the solar names are now actually a "cheap" and represent a long term "energy shortage" play are:
- Silicon prices are expected to drop rapidly due to additional capacity coming on board later this year and early next year. Look at price of WFR (silicon supplier)- cut in half due to rapidly declining margins
- This will lead to lower input prices and thus lower final product prices, which in turn means that the currently "crowded" field will most certainly get thinned out dramatically as some of the smaller players will go out of business because of not being able to match the scale of "big boys". I thus don't expect margin to drop as fast as many of the analysts are expecting in the medium term. STP's results from yesterday are a good example.
- The larger companies ("survivors") will continue dropping prices in lockstep with silicon price declines which will in turn support the long term cost/benefit comparison vs "conventional" sources
- Utilities are currently at the early stages of the next upgrade cycle with regulatory pressures almost certainly set to accelerate towards the "renewable" sources of energy
- Regardless of what analysts are saying, solar subsidies are also not going away any time soon regardless who is president here in US, we are in the midst of the "very hot" political season, look for the "Alt-e" subsidy talks to get much more attention. And Europeans will stay in love with the alternative energy sources, regardless of economic conditions or what happens to the housing market in Spain. Anything to get them of "Russian" natural gas needle is even a bigger plus now!
- The most "cost efficient" players should do best in this field long term. And thus while today "thin film" solar players like FSLR are flying higher, they are also riskier long term, because with silicon prices plunging, cost per kwt will drop dramatically for the "traditional" photovoltaic solar players and not so much for "thin film" crowd
- If coal prices keep rising, "power grid" parity is actually not too far away which in turn should again accelerate demand for solar...
Anyway, that's just my 5 cents- make your own decisions :)
P.S. Interesting action in coal stocks (FCL, ACI) over the last 10 days...Fundamentals for coal have not changed as dramatically as they have for copper/nickel/zinc with China and Europe soaking up all the excess here in US due to their own supply issues, so I think, playing them as an "alternative way of participating in the short term commodity bounce" looks interesting as well :)
Read my disclaimer here- I own many of the names mentioned above and could buy/sell/short them at any time. This is not a recommendation of any sort and is rather purely an opinion!!!
