Epic Correction Leads to Depressed Solar Sector

How epic has this correction been? The answer is worse than the 1987 programmatic crash (S&P -32%) but not as bad, to-date, as the 1973 oil crisis (S&P -48%) or the dot-com bubble (S&P -49%). For an excellent graphic of these events and the current housing bubble (S&P -45%) visit Calculated Risk. In this graph each of the indices starts at the same point on the top of the vertical axis, which represents the percentage amount of drop in index value. With the horizontal axis representing time, it can be seen that while the percentage drop of the S&P 500 is not quite as severe as in the case of the corrections of ’73 or ’00, those corrections took 2-3 years to hit bottom. We are less than one year into this correction and the S&P is down 44%.

For sustainable energy the correction to-date has been even more severe. Our graph from the October 7, 2007 S&P 500 peak to the end of October 2008 shows the changes to the four sectors we have been tracking since the S&P peak. At their minimums the four indices were down between 65 – 80%.


CAMINO INDICES VS. S&P 500
Camino Renewable Energy Indices vs. S&P 500 for the period
9-07 through 10-31-08. Camino’s solar index is down 60%.
(Copyright: Camino Energy)


The month of October was particularly bad for sustainable energy where 100% of the companies in our indices had negative returns.


CAMINO’S RENEWABLES INDICES – LAST 30 DAYS THROUGH 10-31-08
Down 32-85% in one month, Camino Renewable Energy Indices
performance for the period Oct. 1st, 2008 through Oct. 31st, 2008
(Copyright: Camino Energy)

So what am I optimistic about? Simple, I’m optimistic the sustainable energy industry will continue to exist and at some point prices get so low that the stocks represent attactive buys. I think this is particularly true for solar as the statistics below show for 10 of the US traded companies I track in the Camino SOLAR index (detail here).


CAMINO’S SOLAR INDEX – TOP TEN AVERAGE RATIOS
Earnings growth would have to fall dramatically
for Caminos’s top ten solar stocks to not be good buys.
(Copyright: Camino Energy)

SOLAR growth rates would have to slow dramatically to make the companies overpriced at current levels. Even if their earnings growth slows by a factor of 4 these ten companies would still be fairly priced. And I don’t see many reasons to expect such a slowing. Modules prices are expected to fall which should boast sales and improve customer ROI. Retail electric prices are virtually unaffected by oil prices in many economies so the basic economic benefit of solar isn’t going away. Subsidies are locked in in the US. Financing should be available with the massive governmental pushes to create liquidity while lowering rates. And the technology continues to improve further driving down costs and improving solar’s competitive position.

There may be other bargins in the sustainable energy sector but the solar sector is a good place to start with plenty of potential investment targets.

Mark Henwood is the founder of Camino Energy, an information provider specializing in globally traded sustainable energy stocks. Disclaimer: Henwood has positions in JASO, SOL, CSIQ, STP, SOLF, and LDK.


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