Solar Stocks: Factoring in the Boom & Bust Cycle of the Market

Markets go up and markets go down and these moves usually occur when no one is expecting it. At the present time solar stocks, the energy industry and the market in general have been in a very serious decline. The Dow Jones is breaking records everyday and the press is full of bearish articles about the market and about the questionable future of the solar industry.

If we take the time, look a little deeper and put aside the general media. I think we will see a very different picture and one that would suggest the very BEGINNING of investor optimism at this time.

The General Market

Earlier in this month the Dow Jones Industrial Index recorded a twelve-year low and the media was full of doom and gloom. This terrible news was all over the financial press, accompanied by scenarios of more of the same to come. In fact, the recent survey from the American Association of Individual Investors (AAII) had fallen to the most bearish level in history - 70% of those surveyed felt that the direction of the market would be down over the next 6 months.

If one looked closer they would see that the "real" picture was not quite as terrible. There are two interesting items below to take note of from an historical perspective. Remember the bottom of a market is always, by definition, the period of greatest fear. I have been a student of the market since 1975 and I can assure you that there is plenty of fear out there now.

1. The last two times the stock market hit a 12-year low was in 1974 and 1932. Both of these times proved to be once in a life time buying opportunities.

2. The previous record of fear by the AAII survey (67% bearish) was October of 1990, the very beginning of the great bull market of the 1990's.

Nothing is 100% for sure, as we all know. But I think we are either at a significant bottom or very close to it. Everything is so "oversold" at this time, that I think the worst case is that we get a significant rally in what could still be a bear market.

Two other items I think are worthy of note. Last week there were a number of indications that two very significant negatives could be turned to the positive very shortly.

1. The mark to market accounting rule will be modified to reflect "reality." This will positively impact balance sheets significantly.

2. The uptick rule will be re-instated. This will stop short sellers from pushing stocks lower and fanning the flames of panic and fear.

Keep in mind that all the bad news out there is in the press now. We already know all the bad news. Remember that the stock market is actually a discounting mechanism that looks out 6 to 9 months into the future. We do not need good news to turn the market around, only less bad news.

The Solar Stock Sector

Solar stocks have also been doing terribly since the second quarter of 2007. But just like the general market, we need to look a little deeper, beyond the media hype, and see what is actually happening in the solar sector of the market. One of the measures (tools) that I utilize when looking at individual stocks is their 50-day moving average and whether the current price is above (bullish) the 50-day average or below (bearish) the average. It is not the only way to look at stocks and may not be the "best," but it always seems to give me an idea of which way a stock is heading in the short to medium term.

At the current time, 3 of the 35 solar stocks I follow are above their 50-day moving average. On the other hand 92% of the stocks (32 of 35) are below their 50-day moving average. This clearly tells me to exercise extreme caution in the solar sector.

To put it a different way, I do not think all the bad news regarding the solar sector is out yet and that there will be future negative surprises, such as earnings disappointments, inventory write-offs and possibly even bankruptcies. The solar sector will probably get carried up if the general market rallies, but since it will have to work out some additional problems; I do not think the rally will be sustainable.

However, if the current project financing "roadblock" suddenly opens up, a much more sustainable rally would be possible.

Numerous opportunities will come, but investor patience will be required to wait out this tough period and for sector volatility to "calm" down. This is still an embryonic industry and it is going through a painful contraction and consolidation phase.

Wall Street Wisdom - A few general lessons I have learned over the years

Assuming the above analysis is reasonably correct, what wisdom and benefits can be gained from this current situation?

1. Markets and stocks always get ahead of themselves (in the short term) and subsequently go to extremes in both the up and down directions.

2. When an investor is researching potential investments they must understand that a company needs to be looked at in two ways:

   1. As a company with a business and

   2. As a stock, separate from the business of the company

   For example, you can have a good company and a bad stock and you cannot "fall in love" with the company, you have to look at both. A perfect example of this is one of the greatest and most respected companies in the world - General Electric. I think it is still a "great" company, but the stock has gone from $42.00 in early 2008 to a low of approximately $6.00 last week.

   Has General Electric become an unsuccessful company that is going out of business and has no future? I seriously doubt it, but it is an almost perfect example of a good company with a bad stock.

3. The solar industry has a very bright future, for decades to come. However, you have to keep in mind that we are only at the very beginning of the industry's growth. As a result, in addition to enormous opportunities that lie ahead, we will also most likely see above average volatility and more technical failures than successes. This is the way all new industries start up, grow and finally emerge. Investors have to be aware of this level of risk (and opportunity) and act appropriately according to their own financial tolerance for risk.

4. Any correction in solar stocks or the market in general can also be turned around and provide an advantage for the patient investor. When a sector or market corrects it generally takes all  stocks (good and bad) down with it. However, once the correction has run its course the stronger stocks (i.e. those stocks with the highest "relative strength" compared to the general market and to their peer group) will always come back to life faster. This is an excellent way for an investor to pick out the stronger companies in the sector and get involved before they have fully recovered.

Rewards come to those investors who are patient and do not follow the crowd

Aspiring investors need to acquire and nurture patience. Historical data clearly shows that more money is made missing the downside than catching the upside. As I read my e-mails from readers, I get the feeling that people really want to buy solar stocks and ride them into a bright future. Many times I get the sense that they are afraid, that if they delay, they will miss the chance to profit from the solar industries bright future. This is not true. There will be plenty of time and many advances and declines in the future. Be patient, look for the strongest stocks and try not to get swept up in the crowd, because the crowd is always wrong.

Mr. Lynch has worked, for 32 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. Please visit his website for the promotion of solar energy - www.sunseries.net