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Solar Stocks Start Slide amidst Market Turmoil

By Peter Lynch
Exclusively for InvestorIdeas.com
November 23, 2007

As an old saying goes, “A rising tide raises ALL boats” unfortunately, the reverse is also true. Over the past two to three months, the increasing tide of market volatility as been increasing with dramatic speed and the vast majority of stocks, as well as, solar stocks are being swept down with the flow. Although, solar stocks were among the last to succumb they have recently begun to break down.

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As I warned in numerous previous articles:  “if we look at the current situation, it is a combination of a higher risk overall stock market and a solar stock sector that is considerably overextended. Given these odds this would certainly NOT seem to be a time to be buying solar stocks”.

Unfortunately solar stocks were overextended at the time the market woke up to the potential problems in the sub-prime and other credit markets. Oil rising to record levels has probably kept solar stocks from correcting sooner. The combination of a rapidly falling market and an over extended solar market sector is not a pretty sight.

To illustrate the damage that has been done, the following is a list of PV related solar stocks and the amount they have dropped from their 52 week highs.

Company Name

52 Week High/Low

11-21-07 Price

50 Day MA

Ascent Solar Technologies, Inc.

2.41 - 24.50

15.12

16.86

Canadian Solar Inc.

6.50 - 18.88

14.60

10.65

China Sunergy Company Ltd.

4.82 - 16.70

6.97

9.49

Distributed Energy Systems Corp.

.37 - 4.50

0.46

.69

DayStar Technologies Inc.

2.00 - 7.54

3.86

4.81

EMCORE Corporation

3.84 - 11.00

7.82

9.43

Energy Conversion Devices Inc

22.26 - 40.10

25.34

25.93

Evergreen Solar, Inc.

6.97 - 17.55

12.54

10.50

First Solar, Inc.

24.31 - 230

212.50

146.12

JA Solar Holdings Co., Ltd

16.17 - 72.06

51.66

49.67

LDK Solar Company Ltd.

22.27 - 76.75

30.18

46.86

Solarfun Power Holdings Co.

8.22 - 17.69

10.26

12.73

Spire Corporation

7.63 - 19.41

15.59

15.17

Sunpower Corporation

35.40 - 164.49

104.07

101.07

Suntech Power Holdings ADR

26.65 - 75.64

63.74

49.27

Trina Solar Limited

17.06 - 73.06

37.37

54.45

MEMC Electronic Materials, Inc.

37.16 - 81.82

65.60

64.96

Yingli Green Energy Holding Co.

10.48 - 39.20

24.94

29.40

As you can see from the table, the volatility (both daily percent swings and the 52 week range) of the solar sector is enormously high by any measure. This is a classic warning sign of a sector “bubble” that is very much overextended.. I really don’t think Wall Street has “figured out” solar and renewables yet and until they do you will see greater than average volatility and stocks making enormous moves, either up or down, for no apparent reason.

As I mentioned in previous articles one of the measures (tools) that I utilize when looking at individual stocks is their 50 day moving average (MA) and whether the current price is above (bullish) the 50 day average or below (bearish) the average.

As you can see from the table, 10 of the 18 stocks are below their 50 day moving average and would “technically” be deemed in a negative down trend. Another 5 that are currently in down trends and have given technical “sell” signals, are close to going below their 50 day moving averages and the remaining 3 have moved so far so fast that they are still higher than their 50 day average. This negative factor, plus the dramatically increased volatility in the general market tell me that this current correction is NOT over.  Although we may have some positive bounces in solar stock prices and the general media may start to say the “worst is over”, I would be extremely cautious at this junction because the weight of the evidence, in my opinion, tells me we could have further deterioration before the market turns around. Solar stocks need to stabilize and start to form wider and stronger bases of technical support and NOT have these “crazy” days of 5% and 10% moves in either direction in a single day.

I know it is hard to have patience and discipline in the face of constant media hype, from broadcasters with little if any actual experience in finance or the market. It is important to understand that one of the BEST ways to make money in the stock market (and this will sound silly) is to NOT lose money.

What do I mean by that?  Well, it is actually a well kept secret on Wall Street and it will be obvious to you once you understand a little more of the “facts” and are able to separate them from the typical market media hype.

Wall Street’s traditional advice, at least for public investor consumption, is that no one can time the stock market, and that investors should simply buy (whatever Wall Street tells them) and hold (for the long term) through whatever declines come along. However, if we look a little closer and review the actual historical “facts”, the picture looks very different and not so straightforward.

 To illustrate, in the mid 1990’s, there was a study that showed that if an investor had invested $1,000 in the market in 1963 and just left it there, it would have been worth $23,000 by 1993. But if, in an attempt to time the market, the same investor had missed just the 90 best up days during the 30 years, the $1,000 would have grown to only $1,100. Wall Street claimed the study proved it’s too risky to try to time the periods you should be in the market since you might miss out on too many of the best up days.

Sounds like a good idea to me. The results are fairly clear cut and straight forward, correct? However, if we look a little closer we will find that a portion of the study’s findings were not publicized or conveniently overlooked?

This “forgotten” portion of the study revealed that if, through the same period of 30 years, an investor successfully missed just the ninety worst days of the period, the $1,000 would have become $320,000. So you can see, that my earlier statement, “one of the BEST ways to make money in the stock market (and this will sound silly) is to NOT lose money”, is not so “silly” and in fact, may be one of the most important pieces of information that an investor should be aware of.  

Clearly, avoiding at least a portion of market declines is obviously far more beneficial than staying in harm’s way in order to get that last little extra profit. The risk for such a small return is certainly NOT worth it.

So, what does all this mean for solar stocks and the future of the industry?  What it means is that this is still a very HIGH RISK market and one that is only fit for investors with a very high risk tolerance and possessing nimble trading skills. The future of the solar industry is as bright as ever, but now is NOT the time to be stepping into an extremely volatile general market and an even more volatile solar sector. The risk/return ratio is simple too high right now.

I would not be surprised as we move closer to year end that we are greeted by a bottoming stock market and some very favorable solar legislation passing. This confluence of events would be the best of all world’s in the short term, but in the long term the future of solar is bright and the growth prospects and investment opportunities will be enormous for the patient and disciplined investor.
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J. Peter Lynch has worked, for 30 years as a Wall Street analyst, an independent equity analyst and private investor, and a merchant banker in small emerging technology companies. He has been actively involved in following developments in the renewable energy sector since 1977and is regarded as an expert in this area. He is currently a financial and technology consultant to a number of companies. He can be reached via e-mail at Solarjpl@aol.com.

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