Solar Stocks Slide in the Midst of a Major Correction

The stock market in general has now slipped into "official" bear market territory and the press is full of negatives, soon we will see the dreaded "R" word everywhere (recession) in the press. These are probably the times that separate normal investors from "great" investors. I believe it was John D. Rockefeller who once said that, "the way to make money is to buy when blood is running in the streets."

If you go out into the street today, especially Wall Street, there is indeed blood running. Keep in mind, however, that most reporters, who are ALWAYS far behind reality, are pumping up the gloom and doom. When you start to see "doom" popping up on national magazine covers you can be SURE it has already happened and that the market has more than likely at least partially discounted it.

Amid this general malaise, solar stocks have moved even further to the downside, by roughly 50% since January 2008 versus the Dow, S&P and Nasdaq average of approximately 14.5%. This should be no surprise, since younger companies in emerging industries generally have a much higher BETA's (higher volatility) than the normal more mature stock. Take a look at the numbers below based on prices as of the close on Friday, 9-12-08.

I guess you could say that the bad news is that solar stocks have fallen 3 times more than the averages and the good news is that hopefully they are close to a bottom. One thing for sure is that when they do turn up they will move just as fast to the upside as they have to the downside. So far to date, their higher volatility has worked BOTH ways.

Unfortunately, the general weakness of the U.S. stock market and most of the world's stock markets is not helping things. As bad as it is in the U.S. market (down approximately 14.5%), it has been far worse in foreign markets. Clearly many of the world's markets are also in bear markets: India down 30%, China down 45%, Brazil down 30%, South Korea down 32%, Russia down 33%, Hong Kong down 37% and Japan down 33%.

However, now that we are in this bad market the best thing to do is to prepare for the time when it turns around to the upside. Keep in mind, that this turn will ALWAYS take place at the darkest hour and when the word "recession" is everywhere. Remember, it is always psychology NOT reality in the short term. In the long term it is always reality.

How can an investor prepare and possibly see the turn in the market when it comes? Well that is certainly something that can very difficult to predict and mostly likely would require some measure of luck. But one of the simplest short term methods I have used over the years to determine trading points for stocks (and the market in general) is the 50-day moving average. To summarize:

1. If a stock is trading OVER its 50-day moving average it is in an uptrend.

2. If a stock is trading UNDER its 50-day moving average it is in a downtrend.

As you can see from the chart below, the vast majority of solar stocks (prices as of the close Friday, 9-12-08) we follow is BELOW its 50-day moving average and ALL of them are in downtrends. This certainly tells us that the entire solar sector is in a downtrend. The 200-day moving average (also shown below) is a longer term indicator that would NOT be utilized as a short-term trading tool but is more an indicator of how deep a stock has fallen. When the sector does turn up, the stronger stocks will generally turn around and advance first ABOVE their 50-day moving averages — that will be a sign of the turn and traders can make the appropriate moves at that time.

There are three things that are important to understand regarding investing in the current renewable energy industry:

1. Just the Beginning of the Renewables Boom — This is "just the beginning" of the birth of the renewable energy industry. The renewable energy industry is at the same stage now as the automobile industry was in 1900. We are seeing the first few companies becoming public and we will see hundreds more over the next decades. It will be an exciting time for investors and there will be plenty of opportunity for investors to make money and also help the environment, which is a welcome change from the fossil-fuel dominated energy sector of today.
   

2. Highly Volatility — At this early stage of development there will be plenty of volatility in this sector until it becomes a more mature industry. Investors must carefully select their entry points and be patient. This sector is NOT for the faint of heart. Investor have to be careful only to invest a portion of their portfolio, which they have designated for "higher risk" investments. These will be the stocks that you can make the most money on, but also the ones you could lose the most on. Risk and reward have always been intrinsically linked and this is no exception.

3. Pending Legislation Key to Short-Term Uncertainly — I expect that we will see some pending solar legislation pass in the congress before year end, perhaps sooner. If it does NOT happen this year, there will be a further drop in solar stocks, until 2009, when I am relatively sure some form of legislation will be forthcoming. Once this occurs I think it will light a fire under solar stocks and they will make a strong run up before year end. Next year there will be problems in the solar industry, for example: excess silicon supply, margin compression and PE contraction (which we are currently seeing to some degree). But in the shorter term, I see solar stocks making another run up as just another step in their eventual movement to a booming industry of the future.

In conclusion, it is important to remember to be patient and not to overreact to this crazy market with its incredible volatility. There will be plenty of opportunities in the future for the patient, level-headed investor. You need to have your cash reserves ready when the time is right. As I have said a number of times in the past, the best way to make money is not to lose it.

This could not be stated more clearly than by super investor Warren Buffet in his two rules for making money: Rule #1: Never lose money. Rule #2: Never forget #1.

Peter Lynch has worked, for 31 years as a Wall Street security analyst, an independent security analyst and private investor in small emerging technology companies. He has been actively involved in following developments in the renewable energy sector since 1977 and is regarded as an expert in this field. He was the contributing editor for 17 years to the Photovoltaic Insider Report, the leading publication in PV that was directed at industrial subscribers, such as major energy companies, utilities and governments around the world. He is currently a private investor and has from time to time been a financial/technology consultant to a number of companies. He can be reached via e-mail at: SOLARJPL@aol.com.