What's Behind the Rally in Solar Stocks

Solar rooftop installation
Solar rooftop installation

Over the past three months, the poorest performing solar stock has increased by more about 53% and the best performing stock is up about 235%. So far, analysts' price targets on the stocks have not kept pace, which indicates that either they are not convinced that this bull run has legs or they have missed the boat.

A number of factors are playing into the sharp gains for shares of SunPower Corp. (NASDAQ: SPWR), up 235%; First Solar Inc. (NASDAQ: FSLR), up 53%; Canadian Solar Inc. (NASDAQ: CSIQ), up about 143%; Suntech Power Holdings Co. Ltd. (NYSE: STP), up 99%; Trina Solar Ltd. (NYSE: TSL), up 116%, LDK Solar Co. Ltd. (NYSE: LDK), up 121%; and Yingli Green Energy Holding Co. Ltd. (NYSE: YGE), up 152%. Two publicly traded solar installers, Real Goods Solar Inc. (NASDAQ: RSOL) and SolarCity Corp. (NASDAQ: SCTY), are up more than 100% and 50%, respectively, in the past three months. Even MEMC Electronic Materials Inc. (NYSE: WFR) is up 128%, and it only makes polysilicon.

One factor is the belief that polysilicon prices have hit bottom and will begin to rise again as demand from China, the United State and perhaps even Germany picks up. If this is true, then Chinese makers will have to take capacity permanently out of production to help bolster prices. That is problematic.

A second factor is legislation pending in the U.S. Congress that would grant renewable energy firms like solar producers, biofuels producers and others to convert their businesses to master limited partnerships (MLPs) or real-estate investment trusts (REITs). If the law is changed, renewable energy firms could see their cost of financing drop from around the 30% demanded by current tax equity schemes to around 10%.

Just a quick look at a few of the solar players illustrates the disconnect between share prices and analysts' target prices. First Solar closed yesterday at $36.13, compared with a consensus price target of $26.45. SunPower closed at $13.39, versus a target of around $8.35. Even LDK closed near $2 a share, compared with a target of just over $1 a share.

Given that none of these solar players has a positive trailing P/E ratio, and only a few have positive forward multiples, perhaps analysts are just being cautious about the new wave of enthusiasm for solar stocks. It remains to be seen if investor enthusiasm will pull the analysts along with it or whether the lagging price targets have remained low for a reason. Now, though, it is clear that the market is way ahead of the analysts.

Filed under: 24/7 Wall St. Wire, Alternative Energy, Analyst Calls, China, Green Biz, International Markets, Technology Companies Tagged: CSIQ, FSLR, LDK, RSOL, SCTY, SPWR, STP, TSL, WFR, YGE