Caught in the Solar-Power Chaos

 | May 22, 2012 | 7:30 AM EDT  | Comments
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KWT

Even after Monday's rally, most investors were left feeling a bit beaten down after a tumultuous couple of weeks erased most of the gains that had been accumulated over the first four months of the year. But odds are that your portfolio still looks pretty good compared with the solar energy sector, which has been left battered and bruised by a string of negative developments over the past several months. The Market Vectors Solar Energy ETF (KWT) has lost about 50% of its value over the past 13 weeks, and has sunk about 75% over the past year. No doubt, that's a devastating loss for those who were counting on solar power to be the "next big thing" and for it to gradually become a significant portion of the global energy equation.

The pressure on the solar-energy industry has come from all directions. The fiscal crisis in Europe has been the primary culprit, with cash-strapped governments having been forced to slash once-generous subsidies. Meanwhile, some high-profile debacles in the U.S. have whittled away once-robust public support for the industry. More recently, tariffs slapped on imported solar panels have highlighted the fragile nature of this market.

I'm not yet sold on the idea that KWT is ready to turn around, as the recent kickoff to a trade war between the U.S. and China is yet another obstacle this industry will need to overcome. The global solar-power space is in a boatload of trouble, and we could be headed for a wave of bankruptcies that may claim several of the components of this ETF. But at least one of the primary holdings is looking pretty darn attractive, especially as compared with its peers. GT Advanced Technologies (GTAT), a manufacturer of equipment for solar-power manufacturers, actually has quite a bit going for it right now.

GTAT recently reported first-quarter income of about $77 million, extending an impressive string of profitable quarters. That's right, some companies in the solar power industry actually make money. GTAT boasts healthy margins, as well, and is churning out impressive revenue growth. The company's price-to-earnings multiple is now at about 3.5x, well below that of the broad market's average. Even if a fair amount of risk is associated with that cash flow, that's a bargain-basement price if I've ever seen one.

That figure gets even more impressive if you consider the huge cash balances. GTAT has market capitalization of about $500 million, but is holding about $275 million in net cash after subtracting long-term debt. That means the market is valuing the enterprise at only about $225 million, or about 3x first-quarter income. Again, that's tremendous value, even for a company operating in a very risky industry.

Even as earnings and revenue have jumped, over the past month the shares have slumped by about 40%. Investors have been scared away from any company with the slightest ties to solar power, so even this standout -- with its relatively strong fundamentals and an impressive pile of cash -- has been caught that chaos.

So, while I'm not quite ready to make a bet on a broad-based solar ETF, such as KWT or Guggenheim Solar ETF (TAN), GTAT looks like a risk worth taking at this juncture.

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