One of the speculative leaders in 2013 was the solar sector. We are big long-term bulls on the potential for solar power, especially given the steep cost declines over the past 3-5 years that have made solar much more competitive with traditional energy sources. Here were my general thoughts on the sector last year in a SPWR earnings preview:
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).
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I am a long-term bull on the solar industry. Specifically, I’ve been more interested in the servicing side of the business rather than the manufacturing segment. Manufacturing still has significant overcapacity, and is in many cases a commodity business. But that has helped to bring solar costs down quite a bit over the past 3 years, making solar much more competitive vs. traditional electricity. That’s a positive going forward.
Prospects for continued growth in the U.S. look quite favorable. Here was the U.S. Energy Information Adminstration’s most recent assessment in early July:
EIA expects continued robust growth in solar electricity generation, although the amount of utility-scale generation remains a small share of total U.S. generation at about 0.5% in 2015. While solar growth has historically been concentrated in customer-sited distributed generation installations, utility-scale solar capacity doubled in 2013. EIA expects that utility-scale solar capacity will increase by 88% between the end of 2013 and the end of 2015; about 70% of this new capacity is being built in California. However, customer-sited photovoltaic capacity growth, which the STEO does not forecast, is expected to exceed utility-scale solar growth between 2013 and 2015, according to EIA’s Annual Energy Outlook 2014.
The solar sector has benefitted from the increased demand, up more than 30% in the past year. However, TAN, the most widely watched solar ETF, is actually flat since October:
More concerning today is that the ETF is breaking its 200 day moving average, which was briefly breached in mid-May before quickly bouncing. This break is more serious given that it occurs after serious underperformance in the sector relative to the broader market. Fund managers have been paring back exposure for many months now, so further market weakness likely means a more serious selloff in TAN.
Despite this break of the uptrend, implied volatility in TAN is still near a 1 year low, indicating relatively cheap protection:
With the trend break and relatively cheap options pricing, TAN protection here makes sense for longs. We don’t have any position, but the short-term technical situation in the sector looks like a setup for further weakness. We may be interested in a short targeting a move down to the 34-36 area but not on a day like today. Perhaps on a bounce back towards 40.50-41.