Is Now the Time to Buy a Solar Energy Stock with a Triple-Digit PE?
Stellar results from solar module leader First Solar have sent the stock – and the entire solar energy sector – soaring. Should investors pile back into these stocks?

The solar energy sector enjoyed a fabulous year in 2007, rising about 70 per cent, on the back of higher oil prices and investor enthusiasm for the prospects of green energy. Shares in market leader First Solar – which is based in Phoenix and specialises in low-cost thin-film solar cells for commercial applications – rocketed up more than five times during the year.

However, the sector fell 25 per cent in the first six weeks of 2008, as investors dumped high-risk stocks. But now First Solar has reversed that, jumping 30 per cent after it announced results that were far better than expected. Some other stocks in the sector have also enjoyed double-digit rises.

Here are some highlights from First Solar’s results:

                                                2006                        2007
Net sales ($mn)                        135.0                       504.0
Gross profit ($mn)                      54.2                       251.4
Gross margin (%)                       40.1                        49.9
Net income ($mn)                       4.0                        158.4
Net income per share ($)           0.07                        2.12
Net cash holdings ($mn)          227.4                       296.1

The company attributed its good results to its continuing success in driving down production costs, as well as achieving full production capacity at its large German plant. It forecast 2008 revenues of $900 million to $950 million, and said it believed its solar cells would reach cost parity with traditional electricity in the coming two to four years.

So should investors be buying these stocks?

Take a look at some price-earnings ratios (trailing 12 months, from Yahoo Finance):

First Solar                    112.5
JA Solar                        47.0
Solarfun Power            51.2
Sunpower                   709.0
Suntech Power            57.0
Yingli Green Energy   118.6

These are stocks for the brave. Yes, it seems likely that solar energy has a huge future. Some companies will enjoy spectacular growth. But it is early days, and predicting long-term winners is for the foolhardy.

The comparison with the dot-com boom is instructive. Back then all the hype was not wrong. The internet has brought huge change to our lives. But how many of the high-flying stocks stayed aloft?

There will be some big winners from solar energy. But – and this applies even more strongly in a volatile market - surely there will also be many crashing losers.

February 14th, 2008

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Is Now the Time to Buy a Solar Energy Stock with a Triple-Digit PE? Stellar results from solar module leader First Solar have sent the stock – and the entire solar energy sector – soaring. Should investors pile back into these stocks?

Is Now the Time to Buy a Solar Energy Stock with a Triple-Digit PE?
Stellar results from solar module leader First Solar have sent the stock – and the entire solar energy sector – soaring. Should investors pile back into these stocks?