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Solar Stocks Commentary with J. Peter Lynch Market and Solar Outlook for 2010

Point Roberts, South Salem, New York - November 23, 2009 - Investorideas.com and its green investor portal, renewableenergystocks.com, report on solar stocks with the recent edition of Solar Stocks Commentary with J Peter Lynch.

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November 23- To date 2009 certainly seems to be following the historical trends that I presented in February 2009. If you look at history many of the worst years in stock market history are followed by some of the very best years and 2009 certainly seems to be no exception.

Background History on the broad Stock Market

In order to fully evaluate solar stocks and where the industry will be heading we have to look at the broad stock market first, at least, for some short term guidance regarding stocks in general. If the market as a whole decides to decline, then all stocks, including solar related stocks will be affected.

As we all know, 2008 was one of the worst years in history for the stock market in general. In fact, the Dow Jones was down 31.1% for the year, which ranks as the 6th worst year in history. Take a look at the tables below:

Ten Worst and Best Years for the Dow Jones Industrials

Year Yearly return Year Yearly Return
1931 -52.67 1933 66.69
1907 -37.73 1928 48.22
1930 -33.77 1908 46.64
1920 32.9 1954 43.96
1937 -32.82 1904 41.74
2008 -31.1 1935 38.53
1974 -27.57 1975 38.32
1903 -23.6 1905 38.2
1932 -23.07 1958 33.96
1917 -21.71 1995 33.45

 

It is interesting to note that when the market goes to EXTREMES (either plus or minus), it tends to correct to the opposite extreme. It appears to build up momentum in one direction and when it finally turns around and reverses itself, it overshoots in the opposite direction.

For example: Four of the worst years ever were 1929(-17.17%), 1930, 1931 and 1932 which are generally known as the great depression years. However look at the two BEST YEARS in history, 1928 and 1933. One year (1928) was the TOP of the bullish extremes of the 1920’s and the other (1933) was the explosive momentum off of the 4 year bear market of the great depression, which continued up through 1935 until this extreme too was corrected in 1937 (– 32.82%).

The next serious down period was the recession of 1973 -1974 (-27.57%) which was reversed by the strong gains of 1975 (+38.32%).

Most recently we all experienced the "technology bubble" of the late 1990’s and the terrible crash in the technology heavy NASDAQ exchange. The NASDAQ index fell -39.3%, -21.1% and -31.5% in 2000-2001 and 2002 only to rebound UP 50% in 2003.

This strong rebound in 2003 set the stage for the long bull market of 2003 – 2007, which ended in October of 2007 and resulted with the NASDAQ down 40.5% , the Dow down 31.1% and the S&P 500 down 36.1% in 2008.

What about overall market volatility? Once you review the numbers below you will see that there is also a clear correlation between down stock markets and the volatility in the market during those years:

Years with the HIGHEST Volatility in the Stock Market

  • 1931
  • 1929
  • 1932
  • 2008
  • 2000
  • 2001
  • 2002
  • 1973
  • 1974

As you can see, 2008 was the fourth most volatile year in stock market history. The table shows that the worst times were during the great depression (1929-1932), after the internet tech bubble (2000-2002) and after the terrible recession of 1973-1974. If you look at the years AFTER these three time frames you will see that 1933, 2003 and 1975 were three of the BEST years in stock market history.

Now if we take a look at 2009 year to date, we see that despite all the "gloom and doom" that permeates the general media that the stock market has generally climbed the proverbial "wall of worry" and to date has put up some of the best numbers in wall street history with the Dow up 17.57% , Nasdaq up 36% and the S&P index up 21%.

What is to be learned from this brief glance at stock market history?

  1. History does seem to repeat itself and as a result we should have some very good years AFTER this current mess has been resolved.
  2. The old stock market adage, "Buy them when the blood is running in the streets" appears to hold some validity; it is only a matter of timing WHEN to buy. Maybe, in retrospect, March of 2009?
  3. The reasons why we as investors, never seem to learn from these extremes are in my opinion are VERY simple and very easy to forget: FEAR (stock market bottoms) and GREED (stock market tops).

What do these historical trends tell us about the present situation?

They tell me that we have past the FEAR period – November 2008 until April 2009, and are now in the "worry" period, the period between FEAR and GREED. Every step of the way since April we have heard the popular financial press tell us a litany of things to worry about - foreclosures, unemployment, the growing deficit etc. Even though the markets have done so well in such a short period of time in 2009, the market is performing in a very orderly manner and the underlying technical measurements are sound and are still pointing to a higher market despite all of these "worries".

Some additional historical data is worth considering at this time is that since the beginning of this new bull market the market has had 3 corrections of approximately 5%, which is a healthy situation. A market that goes "straight" up with no corrections is a dangerous situation NOT a healthy situation. However, the market has NOT had a correction of 10% since early March of 2009. Why is that significant? It is significant because there has NEVER been a bull market in history that has NOT had at least one 10% correction BEFORE it topped out (Credit: Invest Tech Research). As a result, it is likely that we will have at least one 10% correction and then another move upward before the end of this bull market. In addition, the market has entered its favorable season (November to May) which has historically been a very positive period for stocks.

What has the Solar industry segment done year to date?

The average solar stock year to date has increased 25%, so on the surface it appears that 2009 has been a very good year for solar stocks. However, if you look a bit deeper you will see that while 25% is not bad it is far less than the 36% gain that the Nasdaq has posted. I am comparing it to the Nasdaq because it is the index which most closely resembles the solar sector – smaller companies and many technology related companies.

In addition if you take out the two solar stocks with the biggest gain for 2009 – Canadian Solar (CSIQ) + 225% and Trina Solar (TSL) + 378% the average solar stock actually dropped close to 5% year to date. As a result, while the market in general and the smaller stocks in particular have had outstanding years the average solar stock has done poorly.

Stock Symbol Curr Value 2009 $Change 2009 %Change
AKNS 1.07 -0.65 -37.7907
ASTI 4.82 1.06 28.19
CSIQ 21.01 14.55 225.23
CSUN 4.29 0.34 8.6076
DSTI 0.52 -0.421 -44.7872
EMKR 0.98 -0.32 -24.6154
ENER 10.57 -14.64 -58.07
ESLR 1.47 -1.72 -53.92
FSLR 121.18 -16.78 -12.16
JASO 3.96 -0.41 -9.3822
LDK 8 -5.12 -39.02
RSOL 3.01 -0.64 -17.5342
SOL 4.08 -0.33 -7.483
SOLF 6.64 1.63 32.53
SOLR 4.74 1.85 64.01
SPIR 4.29 -0.85 -16.537
SPWRA 21.48 -15.52 -41.95
STP 15.18 3.48 29.74
TSL 44.46 35.17 378.58
WFR 12.08 -2.2 -15.41
YGE 13.75 7.65 125.41

 

The Solar Stock Market Segment

Currently the solar industry has been subjected to a number of negative influences simultaneously:

  1. The 2 or 3 year long silicon shortage which drove solar stocks over the past few years has turned into a significant silicon surplus, causing a drop in silicon prices and a resultant drop in panel prices.
  2. As a result of #1 solar companies are experiencing extreme margin pressure on their business. As a result, a large number of companies have experienced losses verses prior year gains.
  3. The current financial crisis, specifically the credit crunch has resulted in a large number of projects being cancelled or postponed due to lack of financing. This has resulted in an excess build up of inventory and significant pricing pressure on companies to manage their inventory.
  4. Solar stocks were the "high flyers" of 2005, 2006 and 2007 FAR out performing the general market, but in 2008 solar stocks were down 76% on average, over twice the decline of the general market. Sound familiar? Individual stocks, industry segments and the market in general ALWAYS go to extremes and at some point correct these extremes with a swing to the opposite extreme. However, in this case, the solar stocks will NOT command the high PE’s that they did prior to this.
  5. Finally the solar industry is basically a "start up" industry in the VERY EARLY stages of its development that is not yet well accepted in the general marketplace and has not fully developed its technology future in any of its market sub-sectors. It is too bad the industry had to go thought this phase of its development when all of these other "problems" outside the industry were occurring.

What is next for the Solar Industry?

The next phase of development for the solar industry is the same phase that all new industries went through – autos, semiconductors, computers etc. – it is the consolidation and shake-out phase.

The industry WITHOUT question has a very bright future. However, as in all new industries the strong will survive and the weak will be acquired or go out of business. New technology will emerge and new leaders will distance themselves from the pack. This is NOTHING NEW and will not be unique in any way to the solar industry. The industry is certainly in for "exciting" times in terms of growth and dramatic innovation, but it will also be a very dangerous time for investors who are not attentive and very nimble.

What can Investors expect?

Investors can expect very erratic movements in solar stocks until the overall market volatility starts to get back to the "normal" range. One can also expect, and we have already seen, significant industry consolidation and some (unfortunately) company failures. Keep in mind that this is NOTHING NEW in dramatically emerging industries, but remember that with this dramatic growth will also come greater than average volatility.

With this said is there a way to look at solar stocks (or any stocks for that matter) today and try to "pick" the ones that have the most potential? Once again, it is impossible to accurately determine which will be the winners and which will be the losers. However I think that there are at least three areas that an investor should look that I would consider to be critically important especially in the current climate. If a company possesses ALL three of these characteristics it would have much higher probability that it will be a leader in the next phase of the emerging solar boom.

First: CASH. During times like this CASH IS KING. So an investor will have to make sure to check each potential company’s balance sheet and insure that they have adequate cash reserves to carry them through at least 2009 without need of further financing.

Second: RELATIVE STRENGTH. In periods like this good stocks and bad stocks BOTH are carried down with the general market. However, the better stocks generally drop last and come back (when the tide changes positive) first. These stocks will also most likely be the ones with the most cash (best financial shape) therefore with the best future prospects. As a result, an investor should look for the solar stocks with the highest relative strength compared to the general market - they will be the early leaders in the next market stage and the first to break above their 50 day moving averages (see below).

As a note: the three top solar stocks: Trina Solar, Canadian Solar and Yingli Solar ALL had and continue to have dramatically higher relative strength as compared to the market in general and to the other solar stocks in their sector.

One of the simplest short term methods I have used over the years to determine trading points for stocks (and the market in general) is the 50-day moving average. To summarize:

  1. If a stock is trading OVER its 50-day moving average it is in an uptrend.
  2. If a stock is trading UNDER its 50-day moving average it is in a downtrend".

Third: PRODUCT DIFFERENTIATION. With a new industry like solar the longer term leaders are generally the companies with some form of competitive advantage or product differentiation. Remember these companies may have innovative products, but they must also pass the first two hurdles (cash and relative strength) in order to warrant further consideration as an investment.

Mr. Lynch has worked, for 31 years as an independent analyst and investor in small emerging technology companies. He has been actively involved in following developments in the renewable energy sector since 1977 and is regarded as an expert in this field. He was the contributing editor for the past 17 years to the Photovoltaic Insider Report, the leading publication in Photovoltaics industry that was directed at industrial subscribers, such as major energy companies, utilities and governments around the world. He can be reached via e-mail at: solarjpl@aol.com or at his new website: www.sunseries.net.

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