Chart of the Day – $TAN: Solar Flare

by Enis March 11, 2014 12:02 pm • Commentary

Solar has been one hot sector over the past year.  The most popular solar ETF, TAN, was trading in the high teens last March, vs. almost $50 today.  The ETF has essentially tripled.  That would be quite a feat for any individual stock, but the entire solar sector, on average, has tripled in value in the past year.

Last year I was more bullish on the development companies than the manufacturers, but the left-for-dead manufacturing names have actually been some of the best performers.  We looked in depth at SPWR and FSLR last year, with a preference for SPWR based on its restructuring efforts, as noted in a July post:

The solar industry in the U.S. is on much more sustainable footing, as long-term customer leases combined with government tariffs make solar competitive with traditional electricity in a variety of states.  So SPWR is well positioned going forward after its painful restructuring over the past 3 years, particularly since it’s one of the few full-service solar companies that is vertically integrated (meaning it manufactures its own parts as well).

The real issue is, what’s the appropriate value for this company?  GAAP EPS is expected to be 0.14 in 2013, 0.58 in 2014, and 0.93 in 2015, so the company is valued at about 30x its 2015 EPS.  But if long-term growth trends hold for the industry, the company could be growing earnings 50%+ for the next 5 years.  That’s why the positive news on the restructuring side in February and May caused such big moves higher in SPWR stock.  The balance sheet is much cleaner, the company has re-focused its business, and overall industry trends have improved.

FSLR also underwent a major restructuring program, though its growth prospects over the next few years are lower compared to SPWR, with the accompanying valuation discount.  My thoughts from a September Deep Dive:

Since 2011, the market has gradually come to accept a more-U.S. focused solar environment, not just for First Solar, but for the industry as a whole.  FSLR shuttered its manufacturing plant in Germany in 2012, and the company’s restructuring has finally paid off for investors in 2013.  The company’s downsizing has dramatically altered growth prospects (FSLR is expected to earn less in 2015 than it did in 2008), but valuation was hit so hard that the stock became attractive to value players (still only a 10 P/E stock).

Since then, both stocks have continued higher as the whole sector has been on a tear.  Valuations look less attractive for the sector as a whole, though in today’s market environment stretched can become much more stretched.  However, TAN specifically is at an interesting technical juncture.  The monthly chart:

TAN monthly, Courtesy of Bloomberg
TAN monthly, Courtesy of Bloomberg

TAN has rallied all the way up to its 2008-2011 support area of $50-$55.  In this context, the amazing run of the past year might be due for some consolidation in the coming months, as TAN digests the potential selling near resistance.

The long-term prospects for the solar industry continue to improve.  The stocks have priced in quite a bit of improvement in the past year, so they might be due for a pause.  If the pullback is deep enough, we could be on the lookout for long-term investment opportunities.