Solar, Europe, and the Winter Resolution of 2012
Michael is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
“Three things cannot be long hidden: the sun, the moon, and the truth.” - Buddha
Continuing along my theme that after the Summer Crash and Fall Melt-Up calls of last year, we are headed for a Winter Resolution whereby volatility declines, correlations break, and a trend asserts itself, I wanted to focus on the recent price action of the Guggenheim Solar ETF (TAN) relative to the iShares MSCI EAFE Index Fund (EFA). Take a look at the price ratio below. As a reminder, a rising price ratio means the numerator/TAN is outperforming (up more/down less) the denominator/EFA.
Notice how severely Solar stocks on average underperformed developed markets last year, with performance which was worse than Europe despite the incredible weakness in broader equities overseas. Much of the severe weakness in solar stocks comes from the fact that a large portion of these companies receive subsidies from the very governments which are facing austerity and debt implosion fears. For example, Spain (EWP) cut subsidies for solar companies at the very end of 2010. Spain is the fourth largest manufacturer in the world of solar power technology – and we all know that Spain’s economy is contracting as its government tries to implement some austerity measures to reduce overall country debt.
Laggards do not stay laggards forever. After the significant collapse relative to broader equities last year, it may be worth considering the very real possibility than Solar stocks continue to rebound. What would cause this? Well if inflation expectations are back for real this time around, then it means Europe will not collapse, and the fear of further subsidy cuts to solar companies is overdone. That’s the exact kind of sentiment change that can cause some form of mean reversion in solar stocks to continue occurring, as the spike on the far right of the chart seems to suggest.
The biggest holding in the TAN ETF is First Solar (NASDAQ: FSLR). With a Price to Earnings ratio of 6.86, a Price to Book ratio below 1, initial analysis suggests the stock may be fundamentally cheap on its own. More so than that, it looks like the momentum of First Solar even relative to the broader solar ETF looks promising.
Keep an eye out for solar this year – the sun may just be rising for the group. And yes - recovery in solar means recovery in Europe, which furthers the argument I made on CNNRadio that 2012 may be the year of reflation - you can hear that interview at http://www.thewallstreetshuffle.com/podcasts/20120109-Seg4.mp3 for a complete explanation of the Winter Resolution idea and the return of inflation expectations in markets.
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