2011 was an extremely rough year for solar stocks. An over-supply led to growing inventories and significantly reduced pricing for solar panels and their components. Prices for solar panels fell 51 percent in 2011 to just 88 cents per watt as manufacturers increased production. While this slashed corporate margins, significant cutbacks to government subsidies also lowered demand, creating a powerful one-two punch.
The share prices for many of the leading solar companies plummeted by 70% or more in 2011, as earnings growth sank and investors ran for the exits. Some analysts started questioning the role of solar energy in our future and whether the industry would be able to survive without government assistance.
While solar stocks are down, I would not count them out quite yet. Surging installation in Germany and the U.K. towards the end of the year and China’s plans to double total operating capacity have some investors turning bullish.
“I’m pretty bullish on demand in 2012,” Chew said today in an interview. “If pricing remains the same, I see 30 gigawatts this year and 40 gigawatts next year” of new solar installations worldwide.”
Technical charts are showing a bottoming pattern after months of steep declines and P/E ratios are under 5. As is usually the case in emotional market swings, the solar sector looks like it has become oversold. However, in the past week investors have started snapping up shares on the cheap. This action appears to have hit a crescendo today, with many solar companies rising 30% or more in a single trading day!
January 11, 2012 Solar Gains:
Whether this is just a short-covering rally or the start of a longer-term rebound remains to be seen. Some of these stocks have cooled off a few percentage points in after-hours, but I think today’s action has the potential to be the start of a huge 2012 rally in solar stocks.
While I don’t expect these companies to easily climb back to their 2011 highs, even a retrace of 50% of their losses would equate to gains of 80% or more. Given this potential upside and what I perceive as relatively low downside risk, this could prove to be an excellent entry point into solar stocks for 2012. Of course, any major crisis in the Eurozone could quickly change this outlook, so investors should consider utilizing relatively tight stop orders to protect capital.
We are also seeing signs of a bottom in precious metals and incredible value in many of the oversold junior mining stocks. If you would like to view the Gold Stock Bull model portfolio, keep track of our trades and receive the monthly GSB Contrarian Report, click here to become a Premium Member.