It’s a Stock-Picker’s Market: Stock Market Video
6 Solar Stocks to Keep on Your Watch List
This Week's Fortune Cookie
In Case You Missed It
In this week’s Stock Market Video, I look at the strengthened U.S. and emerging markets, noting that we don’t have the usual roster of strong growth stocks to choose from. It’s very much a stock-picker’s market, and a little research will prove profitable as leadership is provided by some unusual sectors. I also have a few good charts to look at. Click below to see the stocks on Paul’s watch list.
6 Solar Stocks to Keep on Your Watch List
For as long as I can remember, solar power has been the energy source of the future. Sometimes that future was far away, and sometimes—during periods of spiking oil prices, for instance—it was very nearly happening today. But photoelectric panel installations are increasing at a rate of over 100% per year, and I’m thinking that the future may actually be here. (I’ve felt that way several times in the past, but I remain hopeful.)
A full analysis of the factors affecting the adoption of solar cells as a power source would be too long (and too technical) for a Weekend Cabot Wealth Advisory, but I think I can give some useful information in pretty short order.
I have a few observations about the plusses and minuses of the solar industry and a couple of tips that may be of use to investors.
As of about a year ago, solar arrays contributed about 0.7% of the world’s total energy production. Germany (which has been going through a politically mandated changeover from nuclear and other power sources to solar and other renewables) is the global leader in installed solar generating capacity with nearly 10,000 MW (megawatts), followed by Spain (3,400 MW), Japan (2,600 MW), the U.S. (1,650 MW) and Italy (1,200 MW).
One negative about the solar industry is that it has always needed help to compete with the very low cost of fossil fuels, especially coal. Sometimes that help comes from tax and other incentives that reduce the cost of installation. An average U.S. household needs about 600 square feet of solar panels to get the electricity it needs and such an installation can cost over $50,000. Governments can subsidize these installations by direct cash payments and tax incentives or by “feed-in tariffs” that require electrical grid operators to buy excess production at a higher rate.
Subsidy costs are easy to justify when economic times are good. But one serious recession (like the one in 2008–2009) can kick the props out from such programs. Governments can also be persuaded to get behind solar by one-time events like the Fukushima Plant disaster in Japan or the ongoing air pollution health crisis in China. (It’s no accident that China mines and burns 45% of the world’s coal.)
The big question has always been how much the benefits of photovoltaic power are worth paying extra for, but that might not be true for long. Coal-fired electrical plants cost about $3 a watt to build in the U.S. and natural gas plants run about $1 per watt. By contrast, large-scale solar plants cost about $4 per watt.
The kicker is that both coal and gas-fired plants need to pay for fuel throughout their lives, while solar “fuel” is free.
And there’s a little-known law that works in solar’s favor. It’s known as Swanson’s Law, and it’s the solar equivalent of Moore’s Law, which predicted that the size and price of transistors would be reduced by half every 18 months or so.
Swanson’s Law predicts that every time the global manufacturing capacity for photovoltaic cells doubles, the price falls by 20%.
That’s not exactly a screaming headline kind of statistic, but with the government of China moving toward non-polluting power sources on an emergency basis, it has the power of economics behind it. Solar power is already nearing grid parity with fossil fuel power costs, and a 20% reduction would likely do the trick.
I harbor a suspicion that one thing holding solar back has always been that it is a hard technology for a huge company to dominate and profit from.
I have no problem with the profit motive, but corporations are compelled by their duty to their investors to put capital to work in the most profitable way possible. And that hasn’t been solar.
I think the future may be showing up in the construction and sale of turn-key power plants by companies like Canadian Solar (CSIQ) and in the innovative financing schemes of SolarCity (SCTY), which Tim wrote about a couple of weeks ago (read the article here)
My advice to investors is to look for a good low-cost producer like First Solar (FSLR) or SunPower (SPWR) in the U.S. and take a small position with the intention of holding on for the long term. Chinese solar manufacturers have been dinged by proposed U.S. government tariffs in retaliation for Chinese government subsidies to local manufacturers, but firms like Trina Solar (TSL) and JinkoSolar (JKS) are likely to thrive on the strength of Chinese demand alone.
This is a very personal opinion, but I’m hoping that the future for solar will arrive sooner, rather than later.
Tim’s Comment: As a mediocre tennis player long ago (I was on the second doubles team in high school), I respect Arthur Ashe and all he was able to achieve, both on and off the court. But this quote struck me as just a bit too simplistic. I'd like to see a little more about aiming higher. So I looked it up and sure enough, the full original quote says, "To achieve greatness, start where you are. Use what you have. Do what you can." Much better.
Paul’s Comment: Tim’s probably right about the greatness thing, but I’m always thinking about the people who will never achieve anything because they are discouraged or intimidated by others who seem to have more talent and resources. There are also those hobbled by envy or laziness, but the principle is still the same: no matter where you are or what you are or what you’re trying to accomplish, the determination to get off your backside and start is still the critical factor.
In case you didn’t get a chance to read all the issues of Cabot Wealth Advisory this week and want to catch up on any investing and stock tips you might have missed, there are links below to each issue.
In this issue, Tim Lutts, Chief Analyst of Cabot Stock of the Month, writes about the changes that alternative energy sources will make in the world, and how to invest in them. Stock discussed: GasLog (GLOG).
Roy Ward, Chief Analyst of Cabot Benjamin Graham Value Investor, uses this issue to explain the useful PEG (price to earnings growth) ratio, its value and how to calculate it. Stocks discussed: Fortress Investment Group (FIG) and Noble Corp. (NE).
Editor Nancy Zambell of Investment Digest and Dividend Digest writes about the appeal and challenges of investing in small-cap stocks. She gives seven guidelines that will steer you toward companies where the odds are in your favor.
Have a great weekend,
Chief Analyst, Cabot China & Emerging Markets Report
And Editor of Cabot Wealth Advisory