November 28, 2011 at 08:00 AM EST
Is It Time to Call the Bottom in Solar Stocks?
Solar stocks have plunged all year, but some believe the demand in the alternative energy is being underestimated.

Calling a bottom in stocks is never easy. Just when you think a battered sector has been beaten up too much, you get more sellers coming out of the woodwork to push shares lower.

That’s certainly been the case with solar stocks over the past six months, as the sector began a protracted retreat in May that hasn’t ceased yet. Year to date, stocks that comprise the Guggenheim Solar (NYSE:TAN) exchange-traded fund have suffered a third-degree burn, collapsing 61.6%. And the fund has really seen a scorching selloff over the past three months, sinking 47.2%, with a drop of more than 7% just this week.

The severe declines this week have come courtesy of some weak earnings reports by a bevy of high-profile solar firms including Canadian Solar (NASDAQ:CSIQ), JA Solar (NASDAQ:JASO), LDK Solar (NYSE:LDK) and SunTech Power (NYSE:STP), all stocks that are found in the TAN fund.

Canadian Solar, JA Solar and SunTech power all beat expectations on the revenue front, but each fell short of estimates on the earnings side. LDK Solar missed forecasts for both revenue and earnings.

Despite the seemingly bleak circumstances for solar stocks, some believe the sector will once again have its day in the sun. Famed analyst Richard Keiser, of Kaiser Analytics, has predicted a substantive acceleration in solar PV installations in the  U.S. over the next five years. Driving this trend is the continued decrease in solar installation costs. Of course, the decreased costs also has to be married to increased demand if companies in the space are going to see any traction, and here is where Keiser thinks the sun will shine.

According to Keiser, “The United States and China will be critical drivers of that [demand] pick-up, and I believe the speed at which this will happen is being underestimated. First, the United States consumes approximately 4 trillion kilowatt hours of electricity per year, more than all of Europe combined. Second, the distribution of U.S. electricity consumption begins to increase exponentially at $0.18/kWh. As the cost of distributed solar electricity (installations on businesses and residences) reaches that level and below, the potential demand for solar PV will also increase exponentially.”

If Keiser is correct, then we could see stocks in the sector come back very strong next year. For investors willing to take a chance here and step out into the sun at these historically low levels, TAN just may provide your portfolio with a healthy glow.

At the time of publication, Jim Woods held no positions in any of the stocks mentioned in this article.

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