As we have seen at the start of the year, solar stocks have been taking a hit lately.
Back in the spring, the weakness was due to the momentum selloff. Solars are always high-beta. They'd had a great run off their 2013 lows when the price of polysilicon bottomed. But some names had gone up multiple times, so when all high-flying technology stocks pulled back, solars were some of the hardest-hit.
Canadian Solar (CSIQ) retraced 50% back in the Spring. As the market found its footing, all these solar names came back with a vengeance. Canadian Solar shot up 86% from its May lows to its September highs. The volatility has returned again this fall, and once again, all the solar names have been taken down.
As of a few days ago, Canadian Solar had dropped 35% from its September highs. SolarCity (SCTY) had dropped 36% from its August highs. SolarCity also had completely retraced all its gains since June, when it excited the market by acquiring the upstate New York solar panel maker Silevo. All the gains and excitement pumped into the stock were gone in a few weeks of market correction.
Now, not all corrections are equal. This one that we're living through now (albeit it's an up day today) is not caused just by the momo names slaughter. We are dealing with Ebola and a larger-term risk of a pullback. However, the biggest wrinkle to this new pullback, as it relates to solar, is the rapid drop in the price of oil and the 10-year treasury yield.
If this twin drop of oil and the 10-year portends a rapid drop in the global economy, it's a concern for solar. A big one. How economical will the roll-out of solar be, if oil is trading in the $70s for a sustained period? What about the $60s? The $50s?
I think SolarCity will be alright for a while, as well as its residential competitor Vivent Solar (VSLR). They will continue to have a cost advantage for many consumers against traditional grid electricity for a while.
If we are in the beginning of a prolonged global slowdown period, it will be more of a challenge for players like First Solar (FSLR) and SunEdison (SUNE) seeking to be utility providers.
There could be secondary effects. For example, if we're in a cheap oil environment for many months/quarters, it will eventually cause countries like China and others to slow their push towards solar as an oil alternative. Japan might also be willing to slow things down, even as they look for an alternative for nuclear. If this happens, all the Chinese solar panel companies will be hit, and we might see another wave of bankruptcies.
The key question is, is this a buy-the-dip type of moment with the current pullback, or is it something darker and more sinister? I tend to think it's the former. However, I'm not jumping back with both feet into solar just yet.