Solar-power stocks, among the brightest spots on Wall Street all of last year, are beginning to short-circuit.
After doubling, tripling or more in 2007, shares of leading companies that make the pieces and parts needed to generate solar power are showing serious signs of trouble.
Industry leaders SunPower, spwr First Solar fslr and Suntech Power stp have seen their share prices collapse 43%, 34% and 31%, respectively, this year as investors worry the giddiness over the stocks last year drove them to unrealistic valuations.
"These (solar) stocks have had a bubble mentality with them," says Mark Bachman, analyst at Pacific Crest. "It's not the same as the Internet bubble, … but when you look at the valuations, they're frothy."
It's not that investors have given up on clean energy. Demand around the world is strong as governments have decided to subsidize the technology.
But investors are having serious second thoughts about their optimism for several other reasons:
•Falling price for crude oil.
Oil's falling price this year is scaring away solar investors, says Jonathan Hoopes, analyst at ThinkEquity Partners.
Why? Investors generally use the price of oil as a benchmark of conventional energy prices and a gauge of how viable solar is. When the price of oil surges, for instance, investors figure more homes, businesses and utilities will be willing to pay the high upfront costs to install solar-power-generation capabilities, Hoopes says.
The link between solar stocks and the price of oil is uncanny. Solar stocks soared in 2007 as the price of a barrel of oil climbed 63% from the end of 2006 to Jan. 2, the first trading day in 2008. The price of a barrel of oil closed just 38 cents a barrel below the important $100 mark on Jan. 2.
But oil has been struggling in 2008, which has prompted some investors to scurry out of solar stocks. This month, the price of oil has fallen more than 7% to $88.55 a barrel, based on electronic trading Monday, according to Bloomberg. Floor trading was closed for the Martin Luther King Jr. holiday.
Traders and speculators key off such swings in oil prices and try to make a quick buck jumping in and out of solar stocks, Hoopes says. "It's an easy target to push solar (stocks) up and down with the price of oil," he says.
•Jitters about stock market, economy.
When investors get nervous about the stock market and the economy, they tend to jump out of their riskiest stocks and shares in which they have the biggest paper profits. Investors want to lock in gains where they can, and solar stocks certainly qualify, says Michael Carboy, analyst at Signal Hill Capital.
For instance, investors watched the price of First Solar skyrocket nearly 800% in 2007, jumping from $29.84 a share to the year-end price of $267.14. For many portfolio managers who bought and held the stock, it's time to "take the money and run," says Carboy. "People are saying, 'Will solar stocks double or triple again this year? No.' "
•Uncertain regulatory future.
The biggest danger facing solar technology is that solar power isn't economical. It costs 18 to 20 cents to generate a kilowatt of power using solar, vs. 10 to 11 cents a kilowatt for utility power, says John Hardy of American Technology Research.
So it takes massive government subsidies and incentives to persuade homeowners, businesses and utilities to buy solar equipment.
Federal subsidies in the USA expire this year, and political wrangling over extending them is frightening investors, Hoopes says. If the price of oil fell below $60 a barrel, that may take the political pressure off Washington to bankroll alternative sources of energy such as solar, Hoopes says. If that happened, investors would probably flee the stocks faster.
For instance, when tax credits lapsed for the wind industry in 2000, 2002 and 2004, installations of wind equipment plunged 87%, Bachman says.
"The only way solar has demand is due to the subsidies," he says.
Despite the forces pushing solar stocks down this year, analysts agree there's money to be made by investors willing to wait out the short-term volatility.
For instance, while U.S. solar subsidies may be in question, the rest of the world is leading in solar anyway, Carboy says. The USA is only about 10% of the global market for solar, he says.
Germany, Spain, Greece and Portugal remain strongly committed to provide incentives for solar, Hoopes says. And there's huge room for growth. Germany, for instance, gets just 0.3% of its electricity supply from solar vs. 5% from wind and the rest from traditional sources, Hoopes says.
First Solar gets nearly all of its revenue from companies headquartered in Germany, and SunPower and Suntech get about half, according to company regulatory filings.
Certainly, the stocks aren't cheap. SunPower and Suntech trade for 36 times and 28 times 2008 earnings estimates, respectively, Thomson Financial toc says. That's well above the Standard & Poor's 500 index's 13.2 price-earnings ratio based on 2008 estimated earnings. If those two companies continue to grow 53% a year, as Carboy expects, earnings will soon make those valuations look reasonable.
Be prepared for sudden swings, though, whenever investors get nervous about paying so much for future growth. "If you're in it for the long haul, buy the heck out of SunPower and Suntech," he says.
Just remember that in many fast-growing emerging markets, there will be a few winners and many losers, Bachman says. "There will be a slew of Webvans and Pets.com," Bachman says, referring to two Internet companies that dissolved in the dot-com meltdown several years ago.
But there will also be winners, just as eBay ebay and Yahoo yhoo survived. "This is a hot market," he says.