Tag Archives: solar

Persistent Solar And Oil Correlation Presents Huge Opportunities

Summary Solar continues to be heavily correlated with oil in the stock market despite the fact that these two industries are not in competition with each other. The solar market’s recent downturn, likely influenced by falling oil prices, offers investors a huge chance to profit given that solar fundamentals have been stronger than ever. The solar industry has been recording record growth numbers and improving margins, of which have not been fully reflected in the stock market. No matter how many times it has been stated/proven that solar and oil have almost no real world connection, a large stock market correlation continues to exist between these two industries. The solar sector has followed the price movements of oil rather closely over the past year, which has not be pleasant for solar investors. In fact, the Guggenheim Solar ETF (NYSEARCA: TAN ), which captures the broader solar market, experienced a precipitous drop last year at almost exactly the same time that oil began its decline. The ETF then subsequently experienced an upsurge at around the time when oil prices started recovering. Oil prices have collapsed once again over the past few months, which has pushed solar stocks down once again. While solar and oil are not in direct competition, the market correlation between these two stocks is surprisingly strong. This irrational coupling of solar and oil presents some enormous investment opportunities, as the general solar market is incredibly undervalued at the moment. Despite the fact that solar fundamentals are stronger than ever, with leading solar companies generally reporting record growth numbers and growing margins, the solar sector continues to experience downward pressure. Although solar and oil have very little real world connection, oil prices continue to influence solar company valuations to an extremely high degree. This chart depicts the Guggenheim Solar ETF’s price movements along with those of crude oil. Massive Opportunity The recent drop in leading solar names like SunPower (NASDAQ: SPWR ), SunEdison (NYSE: SUNE ), SolarCity (NASDAQ: SCTY ), and Trina Solar (NYSE: TSL ), represents a large investment opportunity. Given that a sizable percentage of these stock declines are likely due to the solar market’s irrational correlation with oil, there is still significant room for growth. In fact, the stock price movements of these companies have almost nothing to do with their actual fundamentals. Trina Solar and SolarCity, for instance, continue to report record growth numbers and yet have declined by ~one-third since oil price started declining again. Even First Solar (NASDAQ: FSLR ), which blew out expectations in its last earnings report, has experienced a slight decline in this period. It is clear that this solar-oil coupling is not going away anytime soon, which makes for great buying opportunities in the solar sector. The Guggenheim Solar ETF represents a good investment choice for those who are not committed to any single solar company. As this solar and oil correlation will likely eventually disappear as investors becomes more astute, this buying opportunity should be short-lived. Improving Fundamentals The solar PV industry continues to fall precipitously on both the utility-scale and distrbuted fronts. As solar is becoming more economical in a growing number or regions and as world leaders increasingly recognize the long-term potential of solar, global demand is soaring to unprecedented heights. The enormous downward pressures faced by solar stocks this past year would suggests that demand is slowing, and yet the exact opposite has been happening. On top of this, leading solar companies are also experiencing rising gross margins, with number one module manufacturer Trina Solar recently reporting quarterly margins of 20%. Given that all cylinders are firing for both the utility-scale and rooftop solar industries, the solar PV space has never been more exciting. Investors should continue to expect rapid growth in the solar PV arena, especially on the distributed side. While it is easy to place solar and oil in the same market category as they are both forms of energy, it must be remembered that solar has almost nothing to do with oil. Ironically, solar market movements have seen far less correlation with natural gas, which does indeed compete directly with solar. Costs continue to fall on every major solar segment. Source: GTM Research, SEIA Conclusion As long as the irrational solar and oil correlation persists, investors will have large opportunities to profit. With the Guggenheim Solar ETF at a two-year low, the solar sector is set for a turnaround. Despite the fact that the solar industry was still recovering from the industry’s most devastating solar glut two years ago, solar companies during that time had comparable valuations to those of present day solar companies. Investors can clearly profit from the current solar environment given the psychological link between solar and oil. In the inevitable scenario in which solar and oil decouple, solar stocks will likely surge. Disclosure: I am/we are long SCTY. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Duke Energy: Ramping Up Its Solar Ambitions

Summary Duke Energy has acquired a majority stake in REC Solar, which should allow Duke Energy to stake a foothold in the promising distributed solar markets. Duke Energy and REC Solar make for an incredibly synergistic partnership, with Duke Energy providing for cheap capital and influence, and with REC Solar providing for its experience an talent. Because REC Solar’s business directly conflicts with Duke Energy’s centralized fossil fuels business, such an acquisition will only be worthwhile if distributed solar eventually becomes the dominant electricity generation model. Duke Energy is smart to expand its renewable energy profile, especially in light of solar’s continually increasing cost-effectiveness and its exponential growth path. The fight between utility companies and distributed solar companies have heated up markedly over the past year. Some major utilities have even started resorting to underhanded tactics , such as influencing congressmen to do their bidding. While most utilities are trying to quash distributed solar, the savvy utility companies are embracing the change. Duke Energy (NYSE: DUK ) has been one of the rare few utilities that have actually seen the rise of distributed solar as a huge opportunity. Duke Energy is currently the largest electricity holding company in the U.S., and has assets all over North and South America. While Duke Energy has a huge reliance on fossil fuels, which has been essential for the vast majority of the its business, the company is slowly making a transition to solar. Unlike most other utilities, Duke Energy is incorporating solar not as a means of meeting federal requirements, but to ensure the company’s survival in a rapidly changing energy landscape. In fact, Duke Energy already has more renewable assets than many of the top renewable companies, with a sizable renewables portfolio consisting of around 1.8 GW worth of solar and wind assets . There are few other fossil fuel based utilities doing the same, with NRG Energy (NYSE: NRG ) being almost the sole exception. Duke Energy has reaffirmed its commitment to solar by acquiring a majority state in REC Solar , which focuses on distributed commercial installations. Duke Energy is willing to invest up to $225M into REC, with the clear intentions of trying to stake a foothold in the commercial solar sector. REC Solar will operate under Duke Energy Renewables(which is the green arm of Duke Energy) and should benefit tremendously from Duke Energy’s financial clout and low costs of capital. As per Duke Energy CEO Allen Bucknam, “We plan to extend the benefits of clean, distributed energy solutions to previously underserved small and medium-sized businesses,” and that “The Duke Energy relationship realizes our strategy to be the one-stop shop for commercial solar by securing a predictable and streamlined customer financing process.” This is what a typical commercial REC Solar install looks like. (click to enlarge) Source: REC Solar The Importance of Maintaining an Early Foothold The utilities sector has seen little to no change in over a century, which means that sudden industry change likely seems extremely threatening, and even alien to most utilities. This could explain why the majority of utilities have been violently opposed to the proliferation of distributed solar companies such as SolarCity (NASDAQ: SCTY ). Instead of working with these companies, which would likely end up being better for everyone involved, most of these companies are fighting tooth and nail to resist change. Duke Solar is clearly an anomaly in this sense, not only accepting such change, but actually transitioning its business model to become more solar friendly. The company’s majority stake in REC Solar leaves no doubt about the company’s renewable ambitions. Not only does REC Solar’s business model come in direct conflict with that of Duke Energy’s, but it also represents an existential threat to the company’s centralized business model. Instead of combating such REC Solar, Duke Energy has gone the infinitely wiser route of acquiring it. By controlling REC Solar’s commercial solar operations, Duke Energy will have a foothold into the promising ditsributed solar sector . Because the vast majority of Duke Energy’s business is based upon centralized fossil fuel generation, the acquisition of a distributed solar company seems counterproductive at best. That is, for every distributed solar customer that Duke Energy signs up, that is one less customer for its main centralized business. While this is a no-win situation for Duke Energy, the company is looking at the long-term energy landscape, where distributed generation may very likely replace centralized generation. Without staking a foothold in the distributed solar sector now, Duke Energy may become obsolete later on. At the relatively small cost of $225M, Duke Energy is setting itself up for future success in an immensely promising market. While $225M is a sizable sum of money for the solar sector, it is merely pocket change for the $60B valuated Duke Energy. Incredible Synergy Duke Energy’s acquisition of REC Solar should amount to some incredibly synergistic effects, especially in financial and political matters. Despite all the talk about distributed solar’s coming dominance, this form of electricity generation currently only amounts to below 1% of total electricity generation, which unfortunately results in a lack of perceived credibility and influence. This is of course where Duke Energy can fill the void, and in return, Duke Energy gets REC Solar’s talent and years of solar industry experience. The distributed solar industry has traditionally suffered from high capital costs , largely due to solar PV’s relatively novel technology. While solar PV has been around for 40+ years, the technology has not seen statistically significant adoption until the last decade or so. Because finance companies have had so little to work on in terms of accessing solar PV’s stability/reliance, such high capital costs are not at all surprising. REC Solar’s capital costs have been no exception in this regard, which makes its Duke Energy partnership perfect for this situation. Duke Energy Renewables has billions on its balance sheet, which should drastically lower REC Solar’s capital costs. Instead of trying to find outside funding for its commercial projects, REC Energy could now go directly to Duke Energy. A lowered cost of capital means that REC Energy would be able to increase its profit margins, expand its commercial operations, or both. This, of course, also benefits Duke Energy. What makes Duke Energy’s acquisition of REC Solar particularly intriguing is if/how Duke Energy will be able to leverage its financial clout to influence politics. For instance, the company’s renewable arm has the majority of its solar assets in North Carolina, which unfortunately does not allow for solar leases/PPAs. While traditional distributed solar companies have nowhere near the political clout to significantly alter North Carolina’s state policies/laws, Duke Energy has more than enough influence to do so(especially considering the fact that the company is based out of North Carolina). If Duke Energy chose to support the legalization of leases/PPAs in the state, REC Solar would benefit tremendously, which would in turn benefit Duke Energy. With such a powerful utility heavyweight entering the distributed solar game, it will be interesting to see how Duke Energy deals with policies negatively impacting solar leasing/PPA. On one hand, these policies help Duke Energy’s core business of centralized fossil fuel generation, but on the other hand, they would severely limit its distributed REC Solar business. Given Duke Energy’s seemingly forward looking nature, it is likely that the company will aid in trying to eliminate such policies, at least in its home state of North Carolina. Risks and Obstacles As was previously stated, REC Energy’s business comes in directly conflict with Duke Energy’s main business of centralized generation. If distributed solar does end up dominating the electricity generation scene, this will prove to be an ingenious acquisition. If such a scenario does not play out though, REC Solar would likely just be taking revenue from Duke Energy’s main business, resulting in a zero-sum game. This could even turn out to be negative-sum game considering all the time and effort that would likely be put into REC Solar. In addition, REC Solar’s business primarily deals with the distributed commercial sector, which has struggled to grow over the past few years. Duke Energy may have a harder time than anticipated in growing REC Solar’s commercial business due to the numerous problems plaguing the commercial solar sector(i.e. lack of efficiency, standardization, etc). While such problems are possible to overcome, they will nevertheless represent daunting obstacles for Duke Energy’s REC Solar acquisition. Conclusion Duke Energy is one of the largest energy companies in the world, having over 7 million customers in North America alone. Despite making its fortune on fossil fuels, the company is smart enough to realize that centralized fossil fuel dominance will not last forever. The company’s transition into renewables, and more importantly, distributed solar, will prove to be key for the company’s future success. With a valuataion of $60B and a P/E ratio of 19 , the company still has upside due to its increasing involvement in the immensely promising solar market. Disclosure: The author is long SCTY. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

SolarCity – Why I’m Selling It And Buying First Solar

Summary SolarCity and First Solar stocks were highly correlated at the start of the fossil fuel price crash of 2014, but decoupled a few months ago. There may be an opportunity to hedge one stock against the other. SolarCity is highly speculative and will not make any profits for many years — if ever. First Solar is an established company with earnings. A pair trade could be a low-risk way to play FSLR and SCTY. Growth in solar energy has been tremendous and will almost surely be strong for the next several decades. According to seig.org (Solar Energy Industries Association): Today, the U.S. has an estimated 20 gigawatts [GW] of installed solar capacity nationwide, enough to effectively power nearly 4 million homes in the United States – or every single home in a state the size of Massachusetts or New Jersey – with another 20 GW in the pipeline for 2015 and 2016, according to SEIA and GTM Research projections. However, there have been major hiccups along the way including (but certainly not limited to) the whimsies of politics and fossil fuel prices. What if there was a way to invest in a solar stock that takes out the uncertainty of those hiccups and even the uncertainty of the overall market? There is a way. Last week I began a new mock portfolio here on Seeking Alpha: the Pairs Trade Portfolio; today I continue it with trades on SolarCity (NASDAQ: SCTY ) and First Solar (NASDAQ: FSLR ). A pair trade is a market-neutral hedge in which an investor essentially pits one company against another. Getting a return on a pair trade is not dependent upon a particular stock rising or falling necessarily, but dependent upon the relative price moves between two stocks (or other financial instruments). I won’t go into details about the hows and whys of pair trading here, as I have already described the theory in detail in a previous article. Please take a look at the link for more information on why pair trades might be a good investment. Correlation Since the start of the oil – and more importantly, natural gas – price crash, we can see from the chart below that First Solar and SolarCity stock prices had a high correlation for a few months before decoupling in early November as Solar City headed pretty much sideways while First Solar dipped substantially more. FSLR data by YCharts The change in correlation gives us our first clue that there might be an opportunity for a pair trade with these two stocks. Should SolarCity have outperformed First Solar? Time to dig a little deeper and see if we think FSLR is a relative bargain compared to SCTY. While the two companies are in the same industry and the stocks have had a high degree of correlation recently, the strategies of the companies could not be more different. SolarCity is pursuing fast growth financed by debt in the residential space while First Solar is a profitable vertically integrated manufacturer and utility-scale operator. Despite the differences in the companies, the macro events that often drive the stocks of most solar companies apply to both. The obvious recent example is the severe drop in fossil fuel prices, but there have been other factors in the past and there will undoubtedly be numerous factors in the future that affect both of these companies. Again, the pair trade largely insulates an investor from external macro events and focuses on one thing only: will one stock outperform the other? I think over the long haul First Solar will outperform SolarCity and below are some reasons. SolarCity: Show Me the Money When and how will SolarCity make money? That’s a big question for anyone interested in the stock and it is an impossible question to answer. At this point, the stock is pure speculation and the company is not expected to post a profit for many, many years. Well, how does one value the company then? SolarCity itself would like investors to focus on “retained value”. In a recent letter to shareholders a retained value number is prominently displayed as one of the highlights of the third quarter. In a presentation used in the third quarter conference call, the company had this slide to show: (click to enlarge) So what is retained value? SolarCity defines it as a discounted cash flow forecast from all megawatts booked as a contract. I won’t go into all of the assumptions that SolarCity makes to compute the retained value figure (much of which is unknown to the public), but I will hit some highlights. First, SolarCity assumes all contracts currently in place or booked to be installed will be renewed after 20 years. This is an outstanding assumption that is obviously flawed. 100% renewals will simply not happen, nor will all bookings even be installed. Second, the company assumes a discount rate of 6%. That is actually high at the moment, so one could argue that the retained value figure should, in fact, be higher than $2.2 billion. However, at some point rates will likely rise – perhaps substantially – and the 6% assumption could be far too low. Third, the company assumes that the technology will be current enough to warrant renewal for 10 years after the initial 20 year period. SolarCity states that the life expectancy of the equipment (not counting inverter replacement) used in its systems is “typically 30 years or more”. I’m going to go into that third point a bit more as I think it is particularly suspect. For one thing, solar panels degrade over time as the following shows: (click to enlarge) (Source: energyinformative.org ) Exact numbers over a long period of time are hard to come by since the vast majority of solar panels in existence have been installed quite recently. Based on my reading, I would estimate that the typical SolarCity customer could expect at least a 10% – 15% drop in power production at the end of 20 years. But more important is that the homeowner’s system will simply be obsolete in 20 years. Efficiency has increased dramatically in the last 20 years and will certainly continue to do so. I would not quite compare a 2015 solar system to using a computer from 1995…perhaps more like 2005. The hypothetical homeowner in 2035 is likely to be better off upgrading a system rather than renewing a lease on an outdated one. SolarCity wants investors to value the company based on this rather dubious metric of Retained Value. The simple fact that there are so many question marks around the computation makes me very nervous about it. Therefore, in my opinion, SolarCity’s retained value metric should be ignored and the company’s assumptions of future cash flows are highly speculative. The risks to the stock are huge. While shareholder’s in SCTY don’t seem to be too concerned about the present situation, let’s look at a more time-honored metric – current cash flow: SCTY Cash from Operations (NYSE: TTM) data by YCharts The above chart shows that the company has grown revenue at a rapid clip since going public but has also been burning through more and more money. Debt has increased substantially recently and will of course continue to do so for the foreseeable future. Right now SolarCity’s debt is financed at very low interest rates, but that could change over the next few years. And perhaps more importantly (and often overlooked by equity investors), it is debt holders that hold the reins to the company as pointed out in Barron’s : Founded in 2006, SolarCity has been consistently unprofitable. Most of its tax benefits and a portion of its future cash flows have been pledged to financing partners whose claims on the company are often senior to common shareholders’. If and when SolarCity begins to have positive cash flow, much of that money is pledged to go to the debt of the company. SolarCity received financing based upon its contract revenue and it has certain obligations to fulfill that exclude stockholders. First Solar: Oh, You Make Money? How Novel! Following up on the cash flow metric charted above, here’s a look at First Solar’s numbers: FSLR Cash from Operations ( TTM) data by YCharts First Solar is not exactly swimming in cash, but it has demonstrated a reasonable track record at generating some decent positive cash flow. In Q3 2014, the company posted an earnings per share of $0.87 and posted full-year guidance of $2.40 – $2.80. Based on 2015 analyst estimates of $4.52 per share, FSLR trades at a forward P/E of only 10.4. Conclusion SolarCity is certainly an interesting speculative play, but the key word there is “speculative”. Actually, the word “interesting” is somewhat key as well, as I prefer my investments to be as boring and predictable as possible. SolarCity is a wild card that may not come to fruition for decades, if ever. First Solar is clearly the lower risk play here. SolarCity is growing far faster, but is not making money doing so and might not ever make a profit. Here’s an interesting tidbit: in Q3 2014, SolarCity posted revenue of $58 million and First Solar posted revenue of $889 million — yet Solar City has a slightly higher market capitalization than First Solar. By going long FSLR and short SCTY, my strategy makes the viability of the solar industry as a whole a largely moot point. If the industry goes into the doldrums for the next 10 years it does not matter as long as FSLR outperforms SCTY. If the market tanks and takes these two stocks down to the single digits, it does not matter; as long as FSLR outperforms SCTY my trade will make money. The Portfolio I’m putting my fake money where my mouth is and buying FSLR and shorting SCTY in my Seeking Alpha portfolio as of about 1:20 pm Eastern Time on Feb 9. Here is what the mock portfolio looks like so far after one week (note that I plan on adjusting, adding, and updating this for years): (click to enlarge) Not much of note yet, but there will be more to come. Be sure to click “follow” if you would like to get real-time alerts on my future articles. Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.