Reviewing 2009 Solar Stocks

I’m no econ expert, but because I’m in the solar industry, I do try to keep an eye on solar shares. And because I’m no econ expert, man, do I ever love it when I come across a really good breakdown of market trends and forecasts. Keeping in mind that this is just one analyst’s informed opinion, of course, I’ve been mulling over renewable energy markets expert J. Peter Lynch’s recent posting on RenewableEnergyWorld.com.

We’ve all been feeling better about solar stocks of late, and why not? They have indeed been on the upswing. But the larger picture, while encouraging with respect to the market crash last year, is still sobering:

The average solar stock year to date has increased 25%, so on the surface it appears that 2009 has been a very good year for solar stocks. However, if you look a bit deeper you will see that while 25% is not bad it is lagging far behind the 36% gain that the NASDAQ has posted…[And if] you take out the two solar stocks with the biggest gains for 2009 – Canadian Solar (CSIQ) + 225% and Trina Solar (TSL) + 378% the average remaining 19 solar stocks actually dropped close to -5% year to date. As a result, while the market in general, and the smaller stocks in particular, have had outstanding years, the average solar stock has done poorly.

Lynch believes that the solar industry will soon go through a consolidation phase in which Darwinian economics will be in full swing. While every industry must go through this at some stage–at least once–and it can be a great time for innovations, he cautions that “it will also be a very dangerous time for investors who are not attentive and very nimble [his emphasis]. This is no place for the age old ‘buy and hold’ investment philosophy.”

Keeping in mind that solar will continue to be a viable, vibrant market with a lot of earning potential, what should investors look for? Lynch says there are three main criteria to look for when choosing companies in which to invest:

1. Cash reserves to last through 2010 without further financing;
2. Good relative market strength; and
3. Product differentiation.

The overall tone is one of optimism, seasoned with the necessity for extra caution in what will continue to be a turbulent era for the solar market. Staying grounded with respect to expectations is healthier than Pollyanna-ism. But compared to this time last year, solar is in a great place, and has a bright future ahead. We shouldn’t lose sight of that.