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Solar stocks gain shine, but clouds remain

The EU and China agreed in July to set a minimum price for Chinese solar panels on sale in Europe.


After a lengthy period in a deep depression, solar power stocks are finally enjoying some sunny days, with many having shot up dramatically in the past few months.

The turnaround is a relief for clean-tech investors who had almost written off the beleaguered solar sector. But analysts warn that many of the structural problems that walloped the industry have not disappeared entirely, and a long-term resurgence is not a certainty.

Still, the upward movement of solar stocks in recent months is remarkable.

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Among U.S.-based companies, solar panel maker SunPower Corp. is trading at almost four times its level at the beginning of the year, while First Solar is up about 50 per cent. SunEdison Inc., which makes and installs solar systems, has almost tripled in that period.

Several Chinese companies that trade on American exchanges have also shot up. Yingli Green Energy and Trina Solar are up by more than 50 per cent and JinkoSolar has doubled.

One of the biggest gains was at Canadian Solar Inc., a company whose headquarters is in Guelph, Ont., but which makes most of its panels in China. Its stock has moved up sharply from just over $3 (U.S.) in April to over $14.

Many panel makers had seen massive stock price declines between 2010 and 2012, some falling by more than 90 per cent as overproduction of solar panels – particularly in China – coincided with decreased demand in many markets. They had almost nowhere to go but up.

There are a number of reasons for the abrupt change in course. First, the demand for solar panels is picking up again after a period of weakness, and is showing particular strength in China, Japan and parts of the United States. At the same time, there has been a shakeout among panel-makers, with consolidation and some bankruptcies trimming the supply of panels.

Consequently, "we are seeing the light at the end of the tunnel in terms of the supply-demand dynamic," said Michael Barker, a senior analyst at NPD Solarbuzz, a U.S. research firm that follows the solar business. He said that balance should continue to improve, although it could get out of whack again if the improved market for panels prompts some companies to crank up production.

Another positive factor is an agreement between the European Union and China – signed in July – that will set a minimum price for Chinese panels sold in Europe. This effectively ends a serious trade dispute where the Europeans had accused the Chinese of "dumping" panels at low prices.

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At the same time, solar stocks have been buoyed by the upward momentum that has swept up stock markets recently, particularly in the United States. In a bull market, "the riskiest and the most speculative stocks go up the most," said Pavel Molchanov, an analyst at Raymond James & Associates Inc. who follows solar stocks.

While there is solid growth in solar markets, and investor sentiment has definitely improved, it is not because there has been some radical transformation in the industry, he said.

Mr. Molchanov said solar stocks will be very volatile in this environment. He noted that SunPower, which reported strong financial numbers last Wednesday, including earnings of $19.6-million, saw its stock fall 14 per cent the next day. "When stocks go up a lot and expectations get ahead of themselves, it doesn't take much for people to take profits."

Khurram Malik, an analyst at Jacobs Securities Inc. in Toronto, said that while demand for solar panels is clearly improving, there is still the potential for large scale dumping of panels by small Chinese manufacturers. Consequently, until there is further consolidation of the industry in China, there will be little in the way of profits for panel makers, he said. "The structural problems have not gone away. It is still a very unhealthy industry."

Mr. Malik warns investors away from the solar sector in general – unless they are risk-takers who are prepared to get in and out quickly. Still, he said, there are some companies that will do well over the long term, particularly if they are in a position to take advantage of low panel prices because they install them or finance installations, rather than make the panels themselves.

He cited California-based SolarCity Corp. as an example of one of these "downstream" players. The company installs panels for consumers and business in 14 U.S. states. It went public at $8 a share last December and now trades at more than $41.

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