Low oil prices are having an effect on solar stocks. It should be no surprise that when fossil fuels are cheap, alternative energy has little competitive advantage. But the imminent bankruptcy filing of SunEdison (SUNE) is a good opportunity to check in on the solar sub-sector and see where the solar stocks are headed through the rest of 2016.
There has been a lot of interest in the trading opportunity afforded by SunEdison. This solar and renewable energy leader has gone from a $30 stock in the summer of 2015 to trade close to $0.20 today.
The Paris climate accords late last year combined with the extension of alternative tax incentives through the next decade have meant that solar companies, particularly those with industrial and institutional services, would benefit in 2016. Despite the current financial disadvantage of solar installations compared to oil or natural gas, large-scale commercial users and most utilities have been increasing their use of solar power while curbing coal use.
Have a look at this chart:
While environmentalists like to point to the 10% of alternative energy use in the U.S. with pride, only a tiny percentage of that is from what we'd consider real renewable sources of future progress: wind, geothermal or solar.
But knowing the strong impetus for new solar installations and the relatively tiny amount of generation currently coming from them, investors have been quick to inflate the prices of just about everyone in the space (we've seen boom and bust cycles from the solar stocks in much the same way as we saw it in oil stocks) and for many of the same reasons.
One of them is cheap financing and overleverage, clearly a big problem with the independent shale producers in oil, and perhaps even worse in the case of solar and renewable energy powerhouse SunEdison. While the opportunity in commercial solar power might have been as large and tempting as drilling for shale oil, SunEdison proves you can just as easily bury yourself with debt to the point of no return in the solar industry.
But the opportunity in solar remains, even after the apparent bust coming in SunEdison. I have always believed that a good energy portfolio required a small (10% to 15%) exposure to alternative energy, and that solar is by far the best subsector in alternative energy to concentrate on. I've also maintained that those solar companies focusing on the institutional and commercial market were the best long-term plays in the sector. With SunEdison fading away, one of the biggest competitors to my long-term plays First Solar (FSLR) and JA Solar (JASO) is disappearing.
While leverage and debt remain concerns with each of these as well, it is not anywhere near the danger level that SUNE appeared to be carrying. They remain my recommendations in the solar space for 2016.