Second Half Could Shine
First some facts, courtesy of the Associated Press:
Solar panel manufacturers have seen their profits and share prices collapse in recent months because a glut of solar panels on the global market has reduced panel prices.
A large increase in manufacturing capacity became available just as subsidies for renewable energy were falling in Europe, which is by far the world's biggest market for solar technology.
But the drop in panel prices has made solar power less expensive, and more attractive to homeowners and utilities. U.S. Solar installations surged 85 percent in the first quarter of this year as prices have dropped 47 percent. Last year solar installations more than doubled compared with 2010.
This is a theme we've covered extensively over the past few weeks.
The downside is solar prices have fallen extremely fast, making it hard for panel makers to generate a profit — at least in the short term. The upside is falling prices have led to record installations and investment.
We're now at “the crossover,” which TheStreet is calling “the most important financial event of the decade.”
It's when solar costs become cheaper than fossil fuels.
So, what does that mean for you?
Well, take a look:
Rapidly falling prices eroded solar companies' profits.
As you can see, a handful of them selected randomly are down between 60% and 80% over the past year.
(It's worth noting that this isn't the ailment that put companies like Solyndra out of business. They simply bet on the wrong technology when solar prices were high, and when silicon prices plummeted, non-silicon-based solar companies couldn't compete.)
At this point, the industry is carving out a bottom. Supply and demand are doing what they do.
Falling prices and increased supply led to rising demand. That demand is eating through the oversupply and prices are starting to stabilize.
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Battle for Pennies, War for Dollars
Solar companies providing the lowest-priced panels with the highest efficiencies and outputs will be the winners.
That means the battle is on for pennies and fractions of percents.
The Motley Fool puts it this way:
Efficiency will be a major differentiator in the second half of the year that will easily make up the pennies in cost difference between modules. Those who can't innovate or invest in new equipment will be left in the dust.
We've reached the point in the industry's development that speculating on technology is almost worthless. Thin-film is slowly dying, and the industry will be dominated by crystalline silicon for the foreseeable future. Costs for crystalline silicon modules have fallen below $1 per watt and only a few pennies separate most manufacturers' costs per watt at this point.
What this means is that a small difference will separate strong manufacturers from the weak ones, who will continue to take share.
Every solar company is fighting for the same thing: reductions in system costs.
It's currently unclear who will reduce costs the most and emerge the eventual winner. So I wouldn't go placing long-term bets on solar companies just yet.
The time for that will be the third or fourth quarter this year if earnings reports start to hint at a return to profitability.
You should be betting on related investments that can drive down the cost of solar in the meantime.
Take a look at that handful of solar stocks once more — only this time with the addition of a technology company providing products that help solar producers reduce costs and increase power output:
If you can't tell which one it is, it's the one up 200% in the past six months.
Remember, every single solar company is looking to reduce costs. And until a clear solar winner emerges, I'd want to invest in the technologies they're using to reduce costs...
You can see how to do that here — along with why this stock could climb thousands of percent as it happens, not just hundreds.
Call it like you see it,
Nick is the Founder and President of the Outsider Club, and the Investment Director of the thousands-strong stock advisory, Early Advantage. Co-author of two best-selling investment books, including Energy Investing for Dummies, his insights have been shared on news programs and in magazines and newspapers around the world. For more on Nick, take a look at his editor's page.