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6 Solar Stocks That Are Heating Up - 16802 views
BALTIMORE (Stockpickr) -- Solar stocks are starting to heat up, and investors need to pay attention because there could be some big money to be made in these stocks in 2011.
Since I am a dedicated trend trader, I am always looking for sectors and stocks that are starting to trend in a clear direction where I think the potential for profits are high, and I'm seeing some very bullish signs in the solar sector. One of the main reasons that the solar sector is starting to heat up is due to rising oil prices. The recent geopolitical events in Egypt are helping to put a floor under oil prices, but oil was already trending higher before the problems broke out in the Middle East.
Higher oil prices tend to make traders run into the solar stocks. They’re in many ways a great hedge against higher energy costs. The thinking here is that companies will start to look more seriously at solar solutions once oil starts to spike higher. That’s a very reasonable assumption, so solar companies have a higher likelihood of seeing new orders whenever oil prices are getting out of control to the upside.
To demonstrate how strong crude oil is, just take a look at a chart for the black commodity. Since September 2010, light sweet crude oil has soared from $72 a barrel to $93 a barrel. The current price of crude is hovering around $88 a barrel. What market players should watch for now is a breakout if crude can manage to get above some past overhead resistance at $93 a barrel. If crude gets above that resistance area, then I expect the next leg of the bull market for oil to begin. This could mean that oil is going to easily push well above $100 a barrel.
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Oil above $100 a barrel will be a boon for the solar stocks. The solar names are already starting to take off, so any move above $100 will provide the next catalyst to take this sector higher. Higher oil prices aren’t the only thing that’s working in the favor of solar stocks. The German government could also be close to providing some much needed certainty for the entire sector.
A recent report out of Reuters said that the German cabinet will agree soon to cut solar power subsides by up to 15% in July, according to government sources. This would be a key for the solar sector because it would end the uncertainly and the dispute between the economy and environmental ministries. It had been previously reported that the German economy ministry wanted to see cuts of up to 25% to slow the booming growth for the solar industry in Germany.
The bottom line: The solar sector is starting to see some uncertainly lifted, and the sector is trending in the right direction as a number of catalyst play out. These are the reasons I believe that investors should strongly consider these solar stocks before the bull run is over.
When I see a sector that looks ready to take off and uptrend, I love to look for leading names that are heavily shorted. One solar stock that fits this bill is best-of-breed First Solar (FSLR). First Solar is engaged in the manufacture and sale of solar modules with an advanced thin film semiconductor technology, and it designs, constructs and sells photovoltaic solar power systems. It’s hard not to like this name because Fist Solar is considered to be the best-managed solar company in the entire complex.
Goldman Sachs Group recently reiterated its buy rating on the stock saying First Solar is its top pick based on one of Godlman's key themes for solar stocks in 2011: owning long-term structural winners that are low-cost, well-funded producers with visible demand and credible capacity growth.
First Solar isn’t an expensive stock, either, with shares trading at just 18 times forward earnings. The company also has a very strong balance sheet, with around $581 million of net cash on the books. This excessive cash will give the company the advantage to expand factory capacity and take advantage of growing demand from around the world for their thin film semiconductor technology.
What I like most about this stock is what I mentioned earlier: It’s a market leader in a sector that’s heavily shorted and uptrending. The current short interest as a percentage of the float for First Solar is currently a ridiculously large 30%. This stock doesn’t have a large tradable float, with only around 55.4 million shares available for trade and around 16.6 million of those shares currently sold short.
If all of the bullish trends in the solar sector continue to come to fruition, then this stock is going to experience a massive short squeeze that should eventually take the stock back to its all-time higher above $300 a share.
Another solar stock that I think is extremely attractive at current levels is GT Solar International (SOLR), which through its subsidiaries is a global provider of polysilicon production technology, crystalline ingot growth systems and related photovoltaic manufacturing services for the solar industry. Basically, GT Solar is the arms dealer for solar companies around the world since the firm makes the equipment that enables solar firms to manufacture solar panels.
The company isn’t a one-trick pony, either. It's recently started to branch out into other markets such as the light-emitting diode equipment sector to help fuel growth well into the future. The company bought a sapphire crystallization firm, Crystal Systems, last year, which marked its entrance into the LED market. GT Solar has already reported in December 2010 that it has booked two orders for LED system that totaled more than $84 million.
Just like First Solar, this stock isn’t expensive, trading at just 9 times forward earnings. The company has a market cap of only $1.17 billion and an enterprise value of just $1.4 billion. GT Solar also has a cash rich balance sheet, with around $259 million of cold hard cash on the books and no debt. This stock is also heavily shorted, with the current short interest as a percentage of the float currently at around 7.9%.
From a technical standpoint, this stock is quickly approaching a breakout if it can manage to trade above some past overhead resistance at around $12 a share. If the stock can get above that key technical level, then the shares will be trading in new 52-week-high territory and should set up nicely to trend much higher. The all-time on this stock sits just under $18 a share, so the upside potential in this name is tremendous if GT Solar wants to enter a sustainable uptrend.
With a B- buy rating, GT Solar is one of TheStreet Ratings' top-rated semiconductor stocks.
Another way to play the solar complex is to buy the leading China-based names because these companies have the advantage of low labor and production costs. We all know that China is the world’s favorite place to put a factory since you can pay your workers next to nothing. This gives the China-based solar players a clear advantage because their bottom line will increase under better pricing environments that are spurred by growing worldwide demand. These firms are also committed to bringing down their operating costs and unwinding some of their high debt levels, which at least weren’t accumulated in a high interest rate environment.
Some of the market-leading China-based names that you should consider are Trina Solar (TSL), ReneSolar (SOL), Yingli Green Energy (YGE) and JA Solar Holdings (JASO). All of these names are starting to see strong volume inflows and bullish technical patterns setup as we begin to see traders jump back into the group. All of these stocks trade at very cheap valuations: Trina trades at a forward prices-to-earnings of just 7, Yingli Green at 8.44, ReneSolar at just 5.40 and JA Solar at a very cheap 5.42.
I just don’t see a lot of downside risk in these China-based names when you consider how cheap they trade vs. forward valuations and when you consider how bullish the backdrop is for solar companies.
To see more solar stocks that look attractive, check out the Hot Solar Stocks To Buy portfolio on Stockpickr.
-- Written by Roberto Pedone in Winderemere, Fla.
At the time of publication, author had no positions in stocks mentioned.
Roberto Pedone, based out of Windermere, Fla., is an independent trader who focuses on stocks, options, futures, commodities and currencies. He is also an outside contributor to Beconequity.com and maintains the website Maddmoney.net, which he sold to Blue Wave Advisors in 2008. Roberto studied International Business at The Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany.