Solar Setting Up for "Sell the News" Rally

I always find it interesting to see human emotion swing so rapidly - the switch from fear to greed can be almost instant. I also find it interesting how traders can use a foregone conclusion ("Obama is gonna win!") as a reason to drive a group up - in this case the solar stocks. The whole group has been on fire the past two days but if you take a step back and put it in perspective - they are back to where they were 3 weeks ago. But if you caught the exact bottom you could of made 100% in a week or so on many names. If you were a week or two early you are basically flat. They are that volatile. These were getting hammered on their high needs for capital to fund business operations along with their customers potential lack of access to capital - not much of that has changed. But perception changes and the "Obama" victory will change everything overnight - even though 95% of the solar market is outside the U.S. Also, did it just become clear Monday morning that Obama would win?

• Solar stocks today have extended yesterday’s torrid rally, apparently getting a boost from investors anticipating that a victory today for Democratic presidential candidate Barack Obama will be good news for the alternative energy business. But before you jump in, you might want to think for a moment about what will actually transpire - and on what timetable.
• While it may be true in the long run that an Obama presidency will be good for solar shares, a change of administrations will not be a cure-all. Raymond James analyst Pavel Molchanov this morning cautioned that investors should not expect any “instant gratification in terms of new goodies from Washington,” especially given that Congress has already approved an 8-year extension of the solar investment tax credit.
• “We agree with the general premise that an Obama White House/Democratic Congress combination sets up the prospect for a greater amount of federal action on the renewables front than would be the cae under Senate McCain,” Molchanov writes. “However, we do not envision immediate action (within, say, the first 100 days) on these issues. To put it bluntly, while solar and wind are important, there are much bigger things on the plate that policymakers in the U.S. are understandably focusing on within the context of the global financial crisis.”
• Several analysts have written bearish commentaries on the solar stocks over the last couple of weeks, citing the negative implications for the solar business of the rally in the dollar and tightening credit markets. And while the bears can’t be too happy today, don’t lose sight of the fact that most solar companies get the vast majority of their business from Europe; it will take a big yet-to-be-created program to drive U.S. solar installations high enough to offset the expected near-term weakness in Germany and other European markets.

None of it makes much sense, but sentiment is sentiment - you just never know when the market turns its attitude - we were buying these at anywhere from 4-8 PE ratios and they fell to 2-5 PE ratios. Kind of silly they ever fell so much, and just as silly they rally on "Obama" but traders don't care about such things - they just want a hot thing to play. I put the chart for ReneSola (SOL) below as one example of the casino action - basically these are setting up for a "sell the news" reaction in my opinion within 1-2 sessions.

One thing that is typical, is analysts downgrading these stocks at the bottom as we saw on Oct 30th, Oct 31st, and Nov 3rd. I don't have an issue with the "reasons" for these downgrades but when stocks are trading at 2-3x earnings I think most "worst" case scenarios are priced i.e. when earnings can in theory drop 50% in 2009 from 2008 levels and the stocks still trade at 4-6x earnings it appears you are a bit "late to the game" in your "downgrades". But analysts are nothing if not consistent.

I still like LDK Solar (LDK) and ReneSola (SOL) as "arms suppliers" to the module makers but as we've been saying for a long time this is going to be a cut throat, highly commoditized end market and this credit crunch is going to winnow the weak much quicker than I anticipated. [Jan 3: The Long Term in Solar] But in *this* market where people do not differentiate it has not helped to be in 1 subsegment of solar over another - they are either "all bad" or "all good". That has been typical of every sector of late - homework on individual companies has been useless.

There is one piece of good news in a sea of bad of late... polysilicon prices seem to be falling hard now that the semiconductor business is having so many troubles.

• Polysilicon prices are falling rapidly, thanks in no small measure to a serious slowdown in the chip sector. And that’s good news indeed for solar companies.
• Dan Ries, an analyst with Collins Stewart, reports today that polysilicon prices have declined about 20%-30% over the past three weeks. In a research note, he says that prices for high purity polysilicon are down about $100/kg to about $300/kg.
  
• Ries notes that he has been expecting a drop in poly pricing by mid-2009, but that it is hitting sooner than expected due to the slowdown in the semiconductor business, the other major consumer of poly supply. Ries thinks the semi industry will use 20%-30% less poly in Q4 than in Q3, freeing up more supply for the solar industry.
• Write Ries: “This decline is a welcome relief for module makers as it will help to offset the sharp reduction in ASPs expected in the quarters ahead due to the Euro.”

I continue to sell almost all we have left in solar into this rally. The stocks are still cheap on a fundamental basis, but the moves have been enormous - and most of the Chinese solar stocks report in the coming two weeks and I expect a lot of mixed news. We'll see if this move lasts past Thursday as traders exit. That said, the animal spirits are now high again so a lot of cheap, more riskier type of fare is moving rapidly in this market; solar stocks are the high beta group that are representative of this.

Long LDK Solar, ReneSola in fund and personal account