Solar stocks rally into U.S. vote

It may be a coincidence, but publicly-traded U.S. solar shares are rallying in anticipation of a Democratic-controlled Congress and White House. Here are some perspectives from Raymond James Equity Research:

“As the U.S. election campaign entered the homestretch over the past week, the alternative energy sector has been a noticeable outperformer, with the WilderHill Clean Energy Index (ECO) up 26% in the past five trading sessions. This recent strength among “green” stocks was highlighted yesterday by one of the best trading days ever for solar stocks – with our solar coverage universe up nearly 15% on average. With election day at hand – which reminds us: have you voted yet? – we take this opportunity to review both near-term and longer-term implications.

First things first. After a day like yesterday, we would not be at all surprised to see some near-term profit-taking in the solar space. It seems clear to us that the recent strength was due, in part, to Senator Obama’s consistent lead in the polls into the campaign’s final days, and the expectation that, if elected, Obama would act to boost Washington’s support for renewable power, solar included. While we don’t claim to have any special knowledge of the polls, an Obama victory does indeed appear likely, and similarly, the Democrats appear poised to increase their majorities in both the House and Senate. If the election turns out generally as the polls suggest, there may well be a case of “buy on the rumor, sell on the news” – in other words, profit-taking among solar stocks. We would be buyers on any such weakness.

What does a Democratic victory mean, objectively speaking, for the solar space? We think that the most important thing is for investors not to expect any instant gratification in terms of new goodies from Washington – that is, above and beyond the solar industry’s huge victory in early October in getting a better-than-expected eight-year extension of the Investment Tax Credit (ITC). We agree with the general premise that an Obama White House/Democratic Congress combination sets up the prospect for a greater amount of federal action on the renewables front than would be the case under Senator McCain (not to mention the Bush administration). However, we do not envision immediate action (within, say, the first 100 days) on these issues. To put it bluntly, while solar and wind are important, there are much bigger things on the plate that policymakers in the U.S. (and indeed worldwide) are understandably focusing on within the context of the global financial crisis. Realistically, we think it will be mid-2009, at the earliest, before any tangible policy initiatives move through Congress, such as a national Renewable Portfolio Standard (RPS) or major new funding programs. And it will be December 2009 before the conclusion of the UN-led climate change talks in Copenhagen, setting the stage for the U.S. to adopt a national cap-and-trade policy – something both McCain and Obama laid out as campaign pledges. As the economy recovers, an Obama administration could be expected to follow through on its renewable energy platform.

While clearly acknowledging the likelihood of some near-term profit taking given the healthy gains of solar stocks over the past week, we remain broadly positive on the space, regardless of the outcome of the U.S. election, and notwithstanding the macro-level challenges that the solar industry faces, including the credit crisis and a weak euro. Our Strong Buy-rated solar stocks are GT Solar International (SOLR), JA Solar Holdings (JASO), SunPower Corp. (SPWRA), and Suntech Power Holdings (STP). The bulk of solar stocks [are] still trading at multiples well below 10x 2009E EPS even after the recent bounce.”

MRM